
ECONOMICS FORBEGIfflERS 



MACLEOB. 



ECONOMICS FOR BEGINNERS 



WORKS BY THE SAME AUTHOR. 



A DICTIONARY OF POLITICAL ECONOMY: 

Biographical, Bibliographical, Historical, and Practical. 
Vol. I. Second Edition. \ Preparing. 

Vol. II. Completing the Work. [In progress. 



THE THEORY AND PRACTICE OF BANKING. 

Third Edition. 2 vols, price -zbs. 
III. 

THE ELEMENTS OF BANKING. Fourth Edition. 

Crown 8vo. price ss. 

IV. 

Adopted by M. Chevalier at the College de France. 
THE PRINCIPLES OF ECONOMICAL PHILOSOPHY. 

Second Edition. 
Vol. I. Price 15.?. 

Vol. II. Part I. Price i2j. Completing Pure Economics. 
Vol. II. Part II. [In preparation. 

v. 
ECONOMICS FOR BEGINNERS. Crown 8vo. 2s. 6d. 



ECONOMICS FOR BEGINNERS 



BY 



HENRY DUNNING MACLEOD, M.A. 

OF TRINITY COLLEGE, CAMBRIDGE, AND THE INNER TEMPLE, BARRISTER-AT-LAW, 

SELECTED BY THE ROYAL COMMISSIONERS FOR THE DIGEST OF THE 

LAW TO PREPARE THE DIGEST OF THE LAW OF BILLS 

OF EXCHANGE, BANK NOTES, ETC. 



NEW YORK 

I. S. ROMANS, PUBLISHER 

251 BROADWAY 

1879 



nov 



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tb ,2 J90H 



/Z-^i(^^'3/ 



TO THE 

REVEREND STEPHEN HAWTREY, M.A. 

FORMERLY HEAD MATHEMATICAL MASTER AT ETON COLLEGE. 



My dear Mr Hawtrey, 

I inscribe this little work with your name in memory 
of the benefit I derived from your teaching long long ago. 

If I have been able to do anything for the Science of 
Economics, it is mainly due to the thorough and constant 
drilling in Euclid which you gave the little band who used 
to meet in your room forty years ago, when Mathematics 
were an exotic at Eton. 

The Great Geometer certainly never had a more zealous 
hierophant than yourself, and I hope that no sacrilegious 
hand will ever be able to molest his ancient reign. 

I would fain believe that you may be pleased to hear that 
the Theory of Algebraical Signs, which was then a Cambridge 
novelty, and which you took such pains to indoctrinate us with, 
has cleared up a point in the Theory of Credit which has 
puzzled jurists and divines for 1300 years, and has hitherto 
been an insoluble enigma to Economists. 

Hoping that you may long have health and strength to 
enjoy your well-earned repose, and that, happy in the esteem 
of many generations of Etonians, it may be said of you 
hereafter that a good Providence 

doi)Ke Sta/X7repes ^fxara navTa 
avTov fxev Xnrapcos yrjpacrKeixev ev fieydpoia-Lv 

Believe me, 

Your ancient and affectionate Pupil, 
H. D. MACLEOD. 



PREFACE. 



The most advanced Economists in the world are now 
satisfied that ancient Authors were right in holding Ex- 
changeability to be the sole essence and principle of Wealth : 
that everything which can be bought and sold, whatever its 
nature may be, is Wealth : and consequently that the Science 
of Political Economy, or, as it may more aptly be termed, 
Economics, is the Science of Exchanges or of Commerce. 

This Httle work is an exposition of the broad outlines of 
the Science according to this viev;, which is that of the 
Third School of Economists, whose doctrines are now 
rapidly gaining the ascendency throughout the world. 

If any readers should wish to see a fuller exposition of 
the reasoning upon which its conclusions are founded, I may 
refer them to my ' Principles of Economical Philosophy,' or 
my Lectures given in the University of Cambridge with the 
Recognition of the Board of Moral Sciences, in which I 
have traced the rise and progress of Economical ideas from 
the earliest antiquity to the present time. 

H. D. M. 



CONTENTS 



INTRODUCTION. 

ON THE MEANING OF THE TERM POLITICAL ECONOMY AND 
ON THE THREE SCHOOLS OF MODERN ECONOMISTS. 

SECT. PAGE 

1 . Changes in the meaning of Political Economy . . . i 

2. Importance of the Meaning of Wealth . . . . . 2 

3. Meaning of saying that Political Economy is a Physical 

Science . 2 

4. Origin of the term Political Economy . . . . . 4 

5. Meaning of the word Wealth in ancient times . . .4 

6. Rise of Economical Ideas in modern times . . • • 5 

7. Rise of the First School of Economists 6 

8. Meaning of ' Production, Distribution, and Consumption of 

Wealth' 6 

9. The Physiocrate doctrine of Productive I^abour ... 8 
io. Reaction against the Physiocrates : Rise of the Second School 

of Economists . . . . . . . . . 10 

11. Inconsistencies of Smith on Wealth 12 

12. The Second School include Labour and Rights as Wealth . 12 

13. Reaction against the Second School of Economists : Rise of 

the Third School 14 

14. Economics is the Science of Exchanges 16 

15. Instances of the superiority of this definition . . . .16 

16. How Economics is a Physical Science 17 

17. It is also a Moral Science . 18 

18. Definition of Economics 18 



Contents. 



CHAPTER I. 

DEFINITION OF TERMS USED IN ECONOMICS. 

SECT. PAGE 

1. Meaning of Economics . . .... 20 

2. Meaning of Wealth, or an Economic Quantity . . . . 20 

3. On the Three Species of Economic Quantities . . .21 

4. Commerce or Economics consists of Six distinct Kinds of Ex- 

change 22 

5. Meaning of the word Property ...... 23 

6. Right of Property and Right of Possession . . . . 24 

7. Words which mean Rights and not Things . . . .24 

8. Three distinct Kinds of Property 25 

9. Application of the Positive and Negative Signs to Property . 26 

10. On yiira in Res and Jura in Pe^'sonas . . . . . 27 

11. On Property as ' Goods and Chattels ' ..... 30 

12. Definition of Value 30 

13. On Money and Credit . 31 

14. Money is a form of Credit . . . . . • • 33 

15. Credit is a Right to Demand something to be Paid or Done . 34 

16. On Sale or Circulation . . . . . . • • 35 

17. On Circulating Medium -36 

18. Meaning of Currency 36 

19. Different Species of Currency 39 

20. On Price, Discount, and Interest 39 

21. On Production and Consumption; or Supply and Demand . 41 

22. The Three Kinds of Production . . . . . . 42 

23. On Cost of Production 43 

24. On Profit 43 

25. On Productive and Unproductive Labour .... 44 

26. On Rent and Hire 44 

27. On Capital 45 

28. How Capital increases 47 

29. On Fixed and Floating Capital 48 

30. On Payment and Satisfaction 50 

31. Meaning o{ Persona and Pes in Roman Law . , . .51 



Co7itents. xi 



CHAPTER II. 

ON VALUE. 

=ECT. I AGB 

1. What the Theory of Value comprises 53 

2. Definition of Value 53 

3. Values of Different Quantities . .... 54 

4. There may a general rise or fall of Prices, but not of Values . 55 

5. On the Error of the Expression Intrinsic Value . . . 56 

6. On Diminution in Value and Depreciation . . . '57 

7. The Origin, Source, or Cause of Value 58 

8. Error of Doctrine that Labour is the Cause of all Value . 59 

9. The General Law of Value : or the General Equation of 

Economics 59 



CHAPTER III. 

ON THE COINAGE. 

1. Meaning of Bullion 61 

2. Meaning of Coins 61 

3. Meaning of Mint Price of Bullion 62 

4. To alter the Mint Price of Bullion means to alter the legal 

weight of the Coins . . . . . . . . 62 

5. Meaning of Market Price of Bullion 63 

6. Gresham's Law of the Coinage 64 

7. What is a Pound ? 65 

8. Mint Price of Gold fixed at 3/. I'js. 10^^. per ounce . . . 66 

9. Gold adopted as legal Measure of Value . . . .66 
10. Silver and Bronze Coinage . . . . . . . 67 



CHAPTER IV. 

THE THEORY OF CREDIT. 

1. The Theory of Credit developed by the Roman Lawyers . 68 

2. On the Nature of Credit 69 

3. Application of the Positive and Negative Signs to Economics 70 



xli Contents. 

SECT. PAGE 

4. If a Product which has been produced is Positive, a Product 

which is to be produced is Negative 72 

5. The terms Positive and Negative used by Jurists . . .73 

6. If the Right to demand 100/. be denoted by ( + 100/.) the Duty 

to pay 100/. is denoted by ( — 100/.) 74 

7. The Theory of the Value of Land 74 

8. If Money is Positive Capital, Credit is Negative Capital . . 76 

9. Three Ambiguities in the Theory of Credit . . . .77 

10. Debts as Negative Quantities 82 

11. Debts as Goods and Chattels 83 

12. On the Transfer of Credit or Debts 84 

13. On the Extinction of Obligations 85 

14. On Release or Acceptilation 86 

15. When +100/. cancels —100/. 87 

16. On Payment in Money 88 

17. On Renewal or Transfer, or Novation 89 

18. On Set-off, or Compensation 89 

19. Two Branches of the System of Credit 9° 



CHAPTER V. 

ON COMMERCIAL CREDIT. 

1. Operations in Commerce giving rise to Bills of Exchange . 92 

2. Circulation of Bills 93 

3. Extinction of Bills by Compensation 94 

4. Traders who buy Debts 94 

5. Credit employed to form New Products 95 

CHAPTER VI. 
THE THEORY OF BANKING. 

1. Origin and Meaning of the word Bank .... 96 

2. Exposition of the Mechanism of Banking . . . . 96 

3. Definition of a Banker 97 

4. Bankers' Notes 99 

5. Methods of operating on accounts . c . . .99 

6. On Cash Credits 100 



Contents. 



Xlll 



CHAPTER VII. 

ON PROFITS. 

PAGE 

Definition of Profit and Rate of Profit . . . -103 

Profits and Wages ........ I04 

Profits of Country Traders ....... 106 

An Expression of Senior's inadequate . . . . . 107 

Interest and Discount ....... 108 

Value of Property depending on the Rate of Interest . . 109 

Instances of Rate of Interest 109 



CHAPTER VIII. 

ON RENT. 



1. Definition of Rent 

2. Rent does not raise the price of corn . 

3. Circumstances which Determine Rent 

4. Rent of Shops . . . . . 



CHAPTER IX. 



ON LABOUR, OR IMMATERIAL WEALTH, AND WAGES. 



1. Definition of Labour . 

2. On Wages .... 

3. The Wages Fund 

4. On Rate of Wages 

5. On the Division of Labour 

6. On the Workman's Share of the 

7. On Co-operation 

8. On Trades Unions, Strikes, and 

9. On the Droit-au-travail 
10. Working Men do not create Wealth 



Price 



Lock-outs 



119 
120 
121 
122 
126 
129 
132 
133 
134 
137 



xiv Contents. 



CHAPTER X. 

ON RIGHTS, OR INCORPOREAL WEALTH. 

SECT. PAGE 

1. Rights are Peainia, Goods and Chattels, and Wealth . . 140 

2. Incorporeal Property of two kinds 140 

3. On Rights of Obligation . . . . . .141 

4. On the Funds . 143 

5. On Tithes 145 

6. On Policies of Insurance 146 

7. On Rights of Expectation 146 

8. On Shares in Commercial Companies . .... 147 

9. The Goodwill of a Business ...... 148 

10. The Practice of a Professional Man 148 

11. On Copyrights 149 

12. On Patents " . . . 150 

13. Ad vowsons and Benefices . . . . . . .150 

14. Tolls and Ferries 150 

15. Shootings and Fishings 150 

16. Street Crossings 150 

CHAPTER XL 

ON THE FOREIGN EXCHANGES. 

1. The Foreign Exchanges 152 

2. Meaning of an Exchange ....... 152 

3. On the Nominal Exchange . . . . ; • I53 

4. On the Real or Commercial Exchange 154 

Inland Exchange . .154 

5. Limits of the Variations of the Exchanges . . . . 156 

6. On Foreign Exchange 156 

7. On Exchange Operations 158 

8. Examples of Foreign Trade . . . . .- .158 

9. On Foreign Loans, Securities, and Remittances as affecting 

the Exchanges . . . . t . . . . 161 

10. On Monetary and Politicnl Convulsions . . . .161 
IT, On the Means of Correcting an Adverse Exchange . . . 162 

Questions for Examination \ . . . .165 



ECONOMICS FOR BEGINNERS. 



INTRODUCTION. 

On the Meaning of the Term Political Economy and on the 

Three Schools of Modern Economists. 

1. The term Political Economy has undergone several 
changes of meaning since it was first originated. The science 
also of Political Economy, or Economics, as it may more aptly be 
termed, has already undergone one transformation since it was 
first created in modern times : and it is now undergoing another. 
It is, therefore, necessary to state briefly these changes of 
meaning of the term Political Economy, and also to give a 
broad general outline of the development of the science in 
modern times. 

The three schools of modern Economists may be broadly 
grouped according to the meaning they attribute to the word 
Wealth : and, consequently, the clearest way in such a short 
general outline as this is, is to give a brief exposition of the 
meaning given to this word. And it must not be supposed that 
this is merely a matter of curious speculation or ingenious 
logomachy. Not only is this word the basi" of a great science, 
but there is none which has so seriously influenced the history 

B 



2 Econo7nics for Beginners. 

of the world and the welfare of nations according to the meaning 
given to it at various periods. 

2. For many centuries the legislation of every country in 
Europe was moulded by the meaning given to the word Wealth. 
J. B. Say, the eminent French Economist, says that during the 
250 years preceding his time, fifty were spent in wars directly 
originating out of the meaning given to this word. Speaking of 
the Mercantile System, which was expressly framed on a par- 
ticular meaning of the word Wealth, Storch says, 'It is no 
exaggeration to affirm that there are very few political errors 
which have produced more mischief than the Mercantile Sys- 
tem. ... It has made each nation regard the welfare of its 
neighbours as incompatible with its own : hence their reciprocal 
desire of injuring and impoverishing one another ; and hence 
that spirit of commercial rivalry which has been the im- 
mediate or remote cause of the greater number of modern 
wars. ... In short, where it has been least injurious it has 
retarded the progress of national prosperity : everywhere else it 
has deluged the earth with blood : and has depopulated and 
ruined some of those countries whose power and opulence it 
was supposed it would carry to the highest pitch.' 

So Whately says, ' It were well if the ambiguities of this 
word had done no more than puzzle philosophers. ... It has 
for centuries done more, and perhaps for centuries to come will 
do more, to retard the progress of Europe than all other causes_ 
put together.' 

These extracts, which are nothing but the literal truth, show 
the gravity and the importance of the inquiry. 

On the Meajting of saying that Political Economy, or 
Economics, is a Physical Science. 

3- It is now universally admitted that Political Economy, or 
Economics, or, as it is often called, the Science of Wealth, is a 
Physical Science, and that investigations in it are to be pursued 



Introduciion. 3 

in exactly the same manner, and its conclusions are to be tested 
by the same principles, as those of other Physical Sciences. 
We must say a few words to explain the meaning of this. 

A Physical Science is a definite body of phenomena all based 
upon a single idea, or quality, of the most general nature ; and 
the object of the science is to investigate the laws which govern 
those phenomena. And any Quantity whatever in which that 
QuaHty is found is an element, or constituent, in that science, 
no matter what other Qualities may be found in it. Hence 
Quantities of the most diverse forms and natures, and agreeing 
in no single other respect than the possession of that single 
Quality, are all elements in that science. 

Bacon says, 'Whosoever is acquainted with forms em- 
braces the unity of nature in substances the most unlike. ... A 
nature being given, we must first of all have a muster or pre- 
sentation before the understanding of all known instances which 
agree in the same nature, though in substances the most unlike.' 

Let us consider the application of this canon to the best 
known physical science. Dynamics. Dynamics is the science 
of Force : and a Force is defined to be ' Anything which causes, 
or tends to cause, motion or change of motion.' This word 
' anything ' is of a very wide nature, and includes Quantities 
which agree in nothing else than in the Quality of Force. Some 
Forces are material, like men and animals. Others are incor- 
poreal, like gravity, electricity, and magnetism, if indeed these 
are not merely different manifestations of the same force. 
Others are explosive, like gunpowder, dynamite, &c. These 
several things, though agreeing in no other single Quality, are 
all Forces. 

Hence when we are told that Political Economy, or the 
Science of Wealth, is a Physical Science, we must first ascertain 
what that Quality of things is which constitutes them ' Wealth : ' 
then we must ascertain how many diverse and distinct Quan- 
tities there are which possess that Quality : and then the 
Science of Wealth, or Economics, is the Science of the Laws 
which govern the phenomena relating to that Quality. 



4 Economics for Beginners. 

On the Origm of the term Political Bconomy. 

4. The term Political Economy is first used in the second 
book of the Economics attributed to Aristotle, but which is un- 
doubtedly spurious. Economy, or Economics, means in Greek 
the means of raising a revenue : and the author says that there 
are four kinds of Economics — the Regal, the Satrapical, the 
Political, and the Domestic. The word TroXts (polis) in Greek 
means a free state ; hence the term Political Economy in this 
passage means the method by which a free state raises a 
revenue. We are not aware of the term being used again till 
modern times. 



On the Mea7iing of the word'^WevtXGa. i7i Ancient Times. 

5. Ancient writers unanimously held that Exchangreabillty, 

or the capability of being bought and sold, is the sole essence 
and principle of Wealth ; and that whatever can be bought and 
sold, or exchanged, is Wealth, whatever its nature may be. 

Thus Aristotle says, 'And we call iVealtb everything 
whose Value can be measured in Money.' So Ulpian, a cele- 
brated Roman jurist, says, ' That is IVealth which can be 
bought and sold.' 

We have here a definition of the same wideness and gene- 
rality as the definition of Force we have already given. Ancient 
writers showed that there are three distinct kinds of things 
which can be bought and sold, and they expressly classed all 
these three distinct kinds of things under the term "Wealtli. 
Thus not only material things can be bought and sold, and are 
therefore Wealth : but Labour can be bought and sold, and 
was therefore classed as Wealth : and besides that, a vast 
variety of abstract Rights, quite separate from any material 
things, can be bought and sold : and were therefore classed as 
Wealth. One of the fundamental definitions of Roman Law 
says, ' Under the term vrealtb {pec7mia) all things, both 
movable and immovable, both corporeal and Rig^lits, are in- 



Introduction. 5 

eluded.' And this doctrine is repeated several times in Roman 
Law. 

Ancient writers thus showed that there are three distinct 
kinds, or orders, of Quantities, which can be bought and sold. 
And reflection will show that there is nothing which can be 
bought and sold which is not of one of these three forms. 
Hence there are three, and only three, orders of Exchangeable 
Quantities : and all Commerce in its widest extent consists of the 
Exchanges of these three orders of Quantities. 

And as these three orders of Quantities may be combined 
two and two in Six different ways, it follows that Commerce in 
its widest extent consists of six different kinds of Exchange. 

Hence, as the Quality of things which constitutes them Wealth 
is Exchangreability, it follows that Political Economy, or Eco- 
nomics, or the Science of Wealth, is the Science of Exchanges, 
or of Commerce in its widest extent. 

Thus it is seen that the ancients possessed the true scientific 
instinct : they unanimously fixed upon one general Quality — 
namely, Exchangeability, or the capability of being bought and 
sold — as the sole essence of Wealth, and they searched out and 
classed all the different kinds of Quantities which possess that 
Quality, and classed them as Wealth. 

On the Rise of Economical Ideas in Modern Times, 

6. We must now very briefly trace the rise and progress of 
Economical ideas in modern times : and the circumstances out 
of which the first school of Economists arose : then the peculiar 
doctrines which they held, which produced a reaction against 
them, and gave rise to the second school of Economists. We 
shall then state the advances made by the second school of 
Economists, and the defects of their system which has produced 
a reaction against them, and given rise to the third school of 
Economists. 

For many centuries it was held that Gold and Silver only 
are Wealth ; and the legislation of every country in Europe was 



6 Economics for Beginners. 

directed to encourage the importation of these metals, and to 
prevent their exportation by every possible means. About the 
end of the seventeenth century it was perceived that it was absurd 
to restrict the term Wealth to gold and silver only, and it was 
enlarged to mean all the products of the earth which conduce 
to the comfort and enjoyment of men. 



Rise of the First School of Econofnists in France, called the 
Physiocrates. 

7. The first school of modern Economists arose in France 
about 1750. At that time the country was suffering the most 
grievous misery from the results of the wars of Louis XIV. ; the 
failure of Law's scheme of paper money : and the system of pro- 
hibitions and obstructions to commerce, or the free interchange 
among nations of their products ; and the iniquitous system of 
taxation. A few righteous philosophers, reflecting on the intoler- 
able misery they saw around them, struck out the idea that there 
must be some great natural science ; some principles of eternal 
truth, founded in nature itself, with regard to the social relations 
of mankind, the violations of which were the causes of that hideous 
misery they saw around them. They named this the science of 
Natural Right, and their object was to discover and lay down 
an abstract science of the natural rights of men in all their social 
relations. This science comprehended their relations towards 
Government, towards each other, and towards Property. 
They also called this great science Political Economy, or the 
science of the regulation of the state. Hence they were called 
the Economists ; and also Physiocrates, from the term Physio- 
cratie, which one of their number called the science. 

8. In this brief outline we can only notice their doctrines 
relating to Property. This part of their system they called the 
* Production, Distribution, and Consumption of "Wealth,' 
To understand the meaning of this phrase we must first state 
the meaning they gave to the word iVealtb. 



The Economists, or Physiocrates. 7 

They defined Wealth to be the material products of the 
earth which are brought into commerce and exchanged, and 
those only. They expressly excluded from the term "Wealth 
those products which the owners consumed for their own use 
and enjoyment : these latter they termed biens : those only 
which were exchanged they termed Richesses. They expressly 
excluded Labour and Rights from the term Wealth : because 
they alleged that to admit Labour and Rights to be Wealth 
would be to admit that Wealth can be created out of nothing. 
It was their fundamental dogma that the earth is the only source 
of Wealth ; because, as they repeated a multitude of times, man 
can create nothing, and Nothing can come out of Nothing. 

We must now state what they meant by the * Production, 
Distribution, and Consumption ' of Wealth, because its true 
and original meaning has been quite misconceived by recent 
writers. This phrase is one and indivisible, and meant the 
Commerce or Exchange of the Material Products of the earth. 

By Production the Physiocrates meant obtaining the raw 
produce from the earth and bringing it into Commerce. 

But this raw produce is scarcely ever in a fit state or in a 
fit position to be used by men : it has to be manufactured and 
transported from one place to another, and perhaps sold and 
resold more than once, before it is ultimately used. All those 
intermediate processes which took place between the original 
producer and the ultimate buyer the Physiocrates termed 
Traffic or Distribution. 

The person who ultimately purchased the products so 
fashioned for his own use and enjoyment they termed the 
.A.clieteur-Consommateur, because this was the completion 
{cofisommatioii) of the transaction. 

The complete passage of the product from the original 
Producer through all the intermediate stages to the Consumer, 
(The Physiocrates designated as Commerce or Excliange. And 
as, originally, any person who wished to consume or enjoy any 
product must have some product of his own to give to purchase 
it, he also was a Producer in his turn. Hence in an Exchange 



8 Economics for Beginners. 

products are consumed {consommes) on both sides. An exchange 
has only two essential terms — a Producer and a Consumer. 
These are the only two parties necessary to Commerce : the first 
seller and the last buyer-consumer ; and they often exchange 
directly between themselves without any intermediate agents. 

It is thus seen that the ' Production, Distribution, and Con- 
sumption of Wealth ' meant simply the science of the commerce 
or exchange of the material products of the earth. 

To take a very simple instance — The farmer grows the corn 
and brings it into the market : he is the Producer. 

He sells the corn to the miller : the miller grinds the corn 
into flour, and sells it to the baker. The baker bakes the flour 
into bread, and sells it to the Consumer. 

The sale of the corn to the miller and the sale of the floui 
to the baker the Physiocrates called Traffic or Distribution. 
The sale of the bread to the buyer they called Consumption : 
and the complete passage of the corn from the farmer to the 
Consumer was Commerce or Ezcbangre. 

But the word Distribution was often used as equivalent to 
Consumption. 

Hence the expression * Production, Distribution, and Con- 
sumption of Wealth ' is one and indivisible, and meant the 
Commerce or Exchange of the material products of the earth. 
But also ' Production and Consumption ' and * Production and 
Distribution ' meant exactly the same thing. Each of these ex- 
pressions meant simply Exchange, and every act of Exchange is 
a phenomenon of Value. 

These two expressions, ' Production, Distribution, and Con- 
sumption of Wealth ' and ' Exchange ' or ' Commerce,' being 
thus expressly declared to be identical by the Economists who 
originated them, have been adopted respectively as the defini- 
tion of Political Economy by the two schools of Economists 
who have succeeded them. 

9. We have now to state a peculiar doctrine of the Physio- 
crates. By Productive ]babour they meant Labour which 



PJiysiocrate Doctrine of Productive Labour, Q 

leaves a Profit after defraying its cost ; and they maintained 
that agricultural labour is the only kind of labour which leaves 
a profit after defraying its cost — that is, that it augments the 
quantity of the material products of the earth, and thus it adds 
to the Wealth of the nation. The excess of the material pro- 
ducts of the earth after defraying the cost of obtaining them, 
accumulated every year, they called the Produit Net. They 
alleged that all other classes of the community are maintained 
out of this Produit Net : and that its Value is the sole revenue 
and income of the state : and the sole increase of Wealth : and, 
as a necessary consequence of such a doctrine, ihey maintained 
that all taxation should be levied directly on the rent of land. 

All other labour expended on the raw produce of the earth, 
either in fashioning it, manufacturing it, or transporting it, they 
called ' Sterile ' or ' Unproductive,' because they alleged that 
it adds nothing to the Wealth of the country ; and they main- 
tained that neither the labour of artisans nor the operations of 
commerce enrich the country. 

They alleged that commerce cannot enrich a country, because 
it is only the exchange of equal value for equal value ; and con- 
sequently that the gains of traders in sales are no increase of 
the Wealth of the nation. 

They alleged that the labour of artisans in manufactures is 
sterile or unproductive, because, though their labour adds to the 
value of the product, yet during the process of manufacture the 
labourer consumes his subsistence ; and the increased value of 
the product only represents the value of the subsistence destroyed 
during the labour. Hence they said that though there is an 
increase of Vatue there is no augmentation of "Wealth. 

These doctrines the Physiocrates maintained through long 
and repeated arguments. How men of the ability of the 
Physiocrates could maintain that a country cannot be enriched 
either by commerce or manufactures, with the examples of Tyre, 
Carthage, Venice, Holland, Florence, England, and scores of 
other places before their eyes, is incomprehensible. With such 
patent glaring facts before them it is surprising that they were 



I O Economics for Beginners. 

not led to suspect the truth of their reasonings. It is one of the 
aberrations of the human intellect which we can only wonder at, 
but not explain. 

The Physiocrates only admitting material products to be 
Wealth, maintained that all exchanges are of products against 
products. 

Reaction against the Physiocrates : Rise of the Second School of 
Economists, 

10. The extraordinary doctrine of the Physiocrates that 
neither Commerce nor Manufactures can enrich a nation, so 
contrary to the plainest facts of history, naturally produced a 
reaction against them throughout Europe. The Italian Econo- 
mists were the first to declare against them. But we need not 
notice them in this brief outline, because they never formed a 
school, as the Enghsh and French Economists did : nor was any 
Italian work ever adopted as a kind of national text-book, like 
those of Smith, Ricardo, and Mill in England, or Say in France. 

In the same year — 1776 — appeared simultaneously the two 
works which lead the two modern schools of Economists — 
Smith's ' Wealth of Nations' and Condillac's ' Le Commerce et 
le Gouvernement.' These two works, though apparently so 
different in name, are in reality identical in conception. They 
both begin by taking the Theory of Value, or of free commerce, 
as the natural state of things, and then afterwards consider the 
interference of Government. Smith and Condillac were the as- 
sociates of the Physiocrates, and emanated from their school, but 
they both revolted against the doctrine that manufactures and 
commerce do not enrich a nation. Smith's work attained imme- 
diate popularity : Condillac's was forgotten amid the crash of the 
French Revolution. Smith's first book is on ' Production and 
Distribution;' Condillac at once says that Economics is the 
Science of Commerce. These ideas are identical : but Smith 
was the parent of the earlier school, and therefore we shall 
follow his line first. 



Second School of Economists. 1 1 

Smith's work begins with ' Production and Distribution,' but 
he knew the meaning of the term as used by its originators, the 
Physiocrates : and he says that its purpose is to ' investigate 
the principles which regulate the exchangeable Value of commo- 
dities.' Thus he sees that the true meaning of the term ' Pro- 
duction and Distribution' is the Theory of Value. McCulloch, 
on the very first page of his edition of Smith, says that Political 
Economy may be called the Science of Values. 

Ricardo calls his work ' Principles of Political Economy,' but 
it is nothing but a treatise on Prices — i.e. Value. 

It is impossible to understand the scope or purpose of 
Smith's work without knowing the doctrines of the Physiocrates. 
The last chapter of the fourth book is a formal refutation of 
their system : but almost every part of it is written with express 
reference to their doctrines. The express purpose and scope of 
Smith's work is to refute the doctrine of the Physiocrates that 
manufacturing and commercial industry are sterile and unpro- 
ductive, and to prove that all labour is productive and enriches 
a nation. And, as scientific reactions very often go from one 
extreme to another, from Labour being counted as nothing it 
came to be counted as everything : and it came to be held that 
Labour is the sole source of all Value and of all Wealth. The 
slightest observation and knowledge of practical business shows 
the utter fallacy of such an idea. As Lord Castlereagh said, the 
pendulum first swung to one side and then it swung to the other, 
and therefore it could not rest in the middle. 

We have now to endeavour to collect what Smith means by 
Wealth. The Physiocrates, as we have seen, restricted the term 
to the material products of the earth, which are brought into 
commerce and exchanged. Thus they made Exchangeability 
essential to Wealth. 

Smith does not begin by expressly defining Wealth : but he 
speaks of the 'real wealth of the country, the annual produce of 
land and labour : ' and, from the number of times he repeats this 
expression, we may assume that to be very much his idea of it ; 



12 Economics for Beginners. 

especially as it was an expression in common use by the Econo- 
mists of other countries. 



11. It would be too long in this brief outline to point out 
the palpable objections to such a definition of Wealth. It will 
be seen that Smith in this phrase has omitted the idea of ex- 
changeability ; and thus lost sight of the essential distinction 
made by the Physiocrates between the products which were 
consumed at home and those brought into commerce and ex- 
changed. 

It will be sufficient here to show Smith's inconsistencies. 
After beginning with the idea of Wealth as being the ' annual 
produce of land and labour,' he subsequently includes human 
abilities as fixed Capital, and part of the Wealth of the nation. 
Hence he admits that Labour is Wealth ; and the whole of the 
second school of Economists treat Labour as an Exchangeable 
Commodity, and discuss the Value of Labour as that of any 
material commodity. Now, human abilities are certainly not 
the 'annual produce of land and labour.' Thus Smith has 
already broken away from the Physiocrate nomenclature, because 
they expressly excluded Labour from the term Wealth. In 
point of science the second school of Economists are right. 
Labour is an exchangeable commodity. It has Value ; and the 
laws of its Value are the same as those of any material commo- 
dity. But then it is a very awkward matter for the fundamental 
conception of the science. For how are we to speak of the 
' Production, Distribution, and Consumption ' of Labour ? 

12. Hence it is seen that the introduction of Labour into the 
science of the Production, Distribution, and Consumption of 
Wealth has already given it a very awkward wrench. But still 
worse remains behind : for under the term Circulating Capital 
Smith expressly includes Bank Notes, Bills of Exchange, and 
other Securities ; but these are simply Rights or Credit : and 
in this he has been followed by the whole of the Second School 
of Economists. All modern writers call Bank Notes Capital. 



Smith on Wealth. 1 3 

But Bank Notes are merely Rights or Credit : hence all modern 
writers include Credit under the title of Capital. 

Now, when Bank Notes, mere Rights or Credit, are admitted 
to be Capital, the definition of the Science as the Production, 
Distribution, and Consumption of Wealth becomes unintelligible. 
For who would understand the meaning of the Production, 
Distribution, and Consumption of Debts or Credits ? whereas 
everyone knows that Debts of all sorts are bought and sold 
like any material commodity. The most colossal branch of 
commerce in modern times — the system of Credit — consists ex- 
clusively in buying and selling Debts : and the exchangeable, 
relations of Debts are governed by exactly the same general 
Law of Value as the exchangeable relations of material commo- 
dities. 

Moreover, Bank Notes, Bills of Exchange, &c., which are 
merely abstract Rights, are only the type and one variety of a 
gigantic mass of Rights of diverse sorts, which receive different 
names according to the source from which they spring. Thus 
the Funds, Shares in Commercial Companies, the Goodwill of 
a business. Copyrights, and many others, are nothing but ab- 
tract exchangeable Rights ; and in this commercial country this 
class of Exchangeable Property far exceeds material property. 
At the present time a man might be the richest person jn the 
whole universe, and yet not have one ounce of tangible and 
visible wealth except the clothes on his back. He might have 
twenty millions in the Funds, twenty millions in Shares in 
companies, and other kinds of Rights, and yet not have one 
particle of Wealth which could be handled or seen. 

Moreover, the whole of the Second School of Economists 
have failed in this. Though they admit one class of Rights to 
be Wealth, they never made the slightest attempt to explain the 
mechanism of the commerce in these Rights. They never 
made the slightest attempt to bring the subject of Credit and 
Banking into the general body of the science : in fact, they have 
given up the whole subject of Banking in hopeless despair. 
Thus we see that the term ' Production, Distribution, and 



14 Economics for Beginners. 

Consumption of Wealth^ is only intelligible when applied, as 
it was meant to be, only to one class of Exchangeable Quan- 
tities, and to one class of Exchanges ; while by the unanimous 
admission of the second school Labour and Rights are Wealth. 
And this is alone fatal to the whole of the system of the second 
school, whatever isolated truths it may contain. 

The fact is that Economics has burst the bonds of the Phy- 
siocrate nomenclature. The fundamental conceptions of the 
Physiocrates were framed to include the single class of material 
products, and when the Second School of Economists came and 
included Labour and Rights in it, which were expressly excluded 
by its founders, they stretched the definition so as to include 
these new objects. But the attempt was hopeless, and only led 
to confusion. It was like putting new wine into old bottles : 
and Bacon says it is idle to expect any great advancement in 
science from superinducing and engrafting new things upon old. 
We must begin again from the very foundations. To obtain a 
fitting general conception of the science we must turn to another 
School of Economists. 

Reactio7i against the Second School of Economists : Rise oj 
the Third School of Economists. 

13. But when we adopt the other definition of the science, 
which its founders declared to be equivalent and identical — that 
of Exchanges or Commerce — it is like the transformation scene 
in a pantomime. Where everything was incomprehensible 
chaos before, like as from the stroke of an enchanter's wand 
it settles into harmony and order. 

In 1776 — the same year that Smith published his work — 
Condillac, the French metaphysician, published his ' Le Com- 
merce et le Gouvernement,' with identically the same object— :- 
namely, to show that both commercial and manufacturing in- 
dustry enrich a nation. He begins at once by saying that 
Economic Science is the Science of Commerce : thereby only 
expressing the idea of the Physiocrates as to the Production 



Third School of Economists. 1 5 

Distribution, and Consumption of Wealth in a much more 
simple and intelligible form, and one — which is its great ad- 
vantage — which is general. 

The first person in this country who distinctly enforced this 
view, that we are aware of, is Whately, when Professor at 
Oxford. ' Smith has designated the work a treatise on the 
Wealth of Nations, but this supplies a name only for the 
subject-matter, and not for the science itself. The name I 
should have preferred as the most descriptive, and, on the 
whole, least objectionable, is that of Catallactics, or the Science 
of Exchanges. . . . 

* In this science the term Wealth is limited to Exchangeable 
commodities ; and it treats of them so far forth only as they are, or 
are designed to be, the subjects of exchange. But for this very 
reason it is, perhaps, the more convenient to describe Political 
Economy as the science of Exchanges than as the science of 
national Wealth. For the things themselves of which the 
science treats are immediately removed from its province if 
we remove the possibility or the intention of making them the 
subjects of exchange ; and this though they may conduce in the 
highest degree to happiness, which is the ultimate object for 
the sake of which wealth is sought. . . . 

' In like manner a musical talent, which is Wealth to a 
professional performer who makes the exercise of it a subject of 
exchange, is not so to one of superior rank, who could not 
without degradation so employ it.' 

The next writer we may mention is Bastiat. He says, 
* Exchange is Political Economy.' ' The causes, the effects, the 
laws, of these Exchanges constitute Pohtical Economy.' And 
speaking of persons rendering each other services, he says, 
' There true Political Economy begins, because it is there we 
see the first appearance of Value.' 

The most eminent Economists in America adopt the same 
system. Thus Professor Perry, of Williams College, says, 
' Political Economy is the science of Exchanges, or, what is 
exactly equivalent, the Science of Value.' ' Wherever Value 



1 6 Economics for Beginners. 

goes this science goes : wherever Value stops this science stops. 
PoHtical Economy is the science of Value and of nothing else. 

14. Adopting, then, this conception of the Science of Eco- 
nomics, which is clearly seen to be the mere generalisation of 
the ideas of the two preceding schools, and which must com- 
mend itself to everyone accustomed to the study of other 
sciences, we have a distinct body of phenomena all based upon 
a single idea, and therefore fitted to form a great demonstrative 
science of the same rank as Mechanics, or Optics, or any other 
physical science. Another great body of particulars is won 
from the vague, floating, and uncertain mass of knowledge, and 
fixed and circumscribed by a definition, and formed into a great 
inductive science, whose investigations must be governed by 
the same general principles of inductive logic as others aie, and 
yet will be found to contribute its quota to inductive logic, 
bearing a general similarity to its sister sciences and yet with 
peculiarities of its own — 

Facies non omnibus una, 
Nee diversa tamen : quails decet esse sororum. 

The expression ' Production, Distribution, and Consumption 
of Wealth ' meant simply the Theory of the Value of one class 
of Quantities, the material products of the earth, while the 
Science of Exchanges means the Theory of Value or of Com- 
merce in general, and includes all Exchangeable Quantities, 
and all Exchanges of every form and variety. 

15. We will now give a few examples to illustrate the 
difference between the two expressions. 

Suppose a person has a piece of land upon which other 
persons want to build houses : the land rises greatly in value : 
the owner sells the land : that is an Exchange and a pheno- 
menon of Value : but how is it the Production, Distribution, 
and Consumption of Wealth ? 

An author writes a popular work : he can sell the Copyright 
of it to a pubhsher : that is an Exchange and an instance of 



How Economics is a Physical Science 1 7 

Value : but how is it the Production, Distribution, and Con- 
sumption of Wealth ? 

Two persons agree to do some work for each other : that is 
an Exchange and an instance of Value : but how is it the Pro- 
duction, Distribution, and Consumption of Wealth ? 

A banker discounts a Bill for a customer by giving him a 
Credit in his books. That is an Exchange and an instance of 
Value : but how is it the Production, Distribution, and Con- 
sumption of Wealth ? 

These few examples, which might be multiplied to any 
extent, show that the expression ' Production, Distribution, 
and Consumption of Wealth ' is only intelligible when applied 
to one class of commodities ; while the expression Science 
of Exchanges is applicable to all exchanges of every descrip- 
tion. 

16. Moreover, by adopting this definition we see at once 
how Political Economy, or Economics, is a physical science. 
What is there in the name Production, Distribution, and Con- 
sumption of Wealth to suggest any resemblance to a physical 
science ? But as soon as we adopt the alternative and equiva- 
lent definition of the Science of Exchanges, we see at once how 
it is a Physical Science. Because, there being three orders of 
Exchangeable Quantities, and therefore six species of ex- 
changes, the object of the science is to determine the Laws of 
the phei omena of these Exchanges : that is, the changes in the 
numerical relations in which these several Quantities will ex- 
change. And as there is a single general law which governs 
the motions of the heavenly bodies, and which explains all the 
phenomena of Astronomy, so it is perfectly easy to show that 
there is a single general Law which governs all the changes in 
the numerical relations of Exchangeable Quantities. And thus 
we have a new Physical Science created, a new body of pheno- 
mena, all based upon a single general conception, brought under 
the dominion of general laws. 

c 



1 8 Economics for Beginners. 

17. Thus it is now clearly seen to be a Physical Science : 
but it is also a Moral science ; because its laws are based upon 
the mores — the rj6q — of men. For we find that the same 
general laws of exchange hold good among all nations, among 
the rudest and the most civilised, in all ages and countries. 
We find that the same causes are invariably followed by the 
same effects : and that is the reason why Economics may be 
raised to the rank of an exact science : a permanent and uni- 
versal science of the same nature as the physical ones : because 
it is based upon principles of human nature which are found to 
be as permanent and universal as those of physical substances 
upon which physical sciences are based. And therefore it is a 
physical moral science, and the only moral science which is 
capable of being raised to the rank of an exact science. 

On the Terms Political Economy and Economics. 

18. The Physiocrates used the term Political Economy to 
denote all the relations of men to the State, to each other, and 
to Property. But J. B. Say was the first to restrict the term 
Political Economy to the Production, Distribution, and Con- 
sumption of Wealth ; as he very justly observed that the 
question of Wealth was wholly independent of different forms 
of Government. Whately proposed the name Catallactics to 
denote its character more clearly. But this change was too 
great to be readily received. There is no advantage to be 
gained by completely changing the name of a science which 
has once acquired a firm hold on popular usage. There are 
few sciences which have not received a great extension or 
alteration of the application of what the meaning of their names 
would suggest. The name of Political Economy, or Economic 
Science, is so firmly rooted in the "pubhc mind that no advantage 
would be got by changing it. Moreover, the true character of 
the science is expressed in its very name. It is sometimes 
supposed that in Greek ot/coy means a house, and that an 
Economist is the master of a house. But oikos has a very much 



Definition of Economics. 19 

wider meaning than that. In the whole range of Greek litera- 
ture, from Homer to Ammonius, oi/co? is used to mean Property 
of all sorts. It is the technical term in Attic Law for a man^s 
whole substance or estate : hence it includes not only all such 
property as land, houses, cattle, corn, and all material things, 
but also such property as the Funds, Shares in Commercial 
Companies, Copyrights, &c. Hence the word Economics is 
the very best term that could be devised to denote the Science 
which treats of the Laws of Property. 

Seeing, then, that the term Political Economy was expressly 
designed by its originators to include the political relations of 
men, which are now excluded from the science, and that the 
term Economics clearly indicates that the science is restricted 
to Property, we shall henceforth use it exclusively in this work : 
and Economics may be defined to be the Science which treats 
of the Laws which govern the relations of Exchangeable Quan- 
tities. 

And M. Michel Chevalier has done us the honour to say 
that he thinks this to be the best definition of the science which 
has yet been proposed. 



C2 



20 Economics for Beginners. 



CHAPTER I. 

DEFINITION OF TERMS USED IN ECONOMICS. 

Meaning of Economics. 

1. Economics is the Science which treats of the principles 
and mechanism of Commerce in its widest extent : or it may 
be called the Science of Exchang-es. 

The word Economics is derived from two Greek words — 
oIk.o9 (oikos), which means Property of all sorts and descriptions, 
including not only lands, houses, cattle, money, &c., but also such 
Property as Bank Notes, Bills of Exchange, the Funds, Shares 
in Commercial Companies, Copyrights, &c., all of which can be 
bought and sold ; and voyios (nomos), a law. Hence Economics 
is the Science which treats of the laws which govern the relations 
of Exchangeable Quantities. It may also be called the Science 
of Value : it is also sometimes called the Science of Wealtb. 

Oji the Meaning of "Wealtli, or a7i Economic Quantity. 

2. Ancient writers unanimously held that Exchangeability 
is the sole essence and principle of Wealth : that the word 
Wealth means anything whatever which can be bought and 
sold ; and consequently that whatever can be bought and sold, 
whatever its nature may be, is "Wealth. 

Thus Aristotle says, 'And we call v;'ealtb everything 
whose value can be measured by money.' So Ulpian, one of the 



Three Species of Economic Quantities, 21 

most eminent Roman jurists, says, ' For that is "Wealtlx '^es) 
which can be bought and sold.' The most recent Economists 
are now agreed that this is the true definition of Wealth. Thus 
Mill says, * Everything forms, therefore, a part of Wealth which 
\idj& a power of purchasing^ This is the definition which we 
adopt. 

On the Tbree Species <?/■ "Wealth ; or Economic Quantities. 

3. Wealth, then, being defined to be anything which can be 
bought and sold, or exchanged, whatever its nature may be, we 
have next to ascertain how many distinct kinds of things there 
are which can be bought and sold. 

1. There are Material things, such as lands, houses, cattle, 
money, jewelry, gold, silver, corn and innumerable other things 
of that nature. 

2. The author of an ancient Greek dialogue called the 
' Eryxias,' or ' On Wealth,' which usually passes under the name of 
'vEschines Socraticus/ adopting Exchangeabihty as the criterion 
of Wealth, showed that if a man can gain his living by giving 
instruction in science, that science is Wealth to him for exactly 
the same reason that gold and silver are Wealth. All modern 
Economists — Smith, Say, Senior, Mill — agree that human abili- 
ties, skill, energy, and capacity are Wealth. The exertion of 
human abilities, skill, and energy in any form which is paid for, is 
Iiabour. And a person may sell his Labour, or services, in 
many capacities, such as a ploughman, an artisan, an advocate, 
a physician, an engineer, &c., and when a sum of money is paid 
for this Labour its Value is measured in money as precisely as 
if it were a material chattel. Therefore Labour is Wealth. 

3. It is laid down as a fundamental definition in Roman Law 
that ' under the term "Wealtli {pecunid) not only ready money 
but everything, both immovable and movable, both corporeal as 
well as Rigrbts, is included. 

In modern times an immense mass of Property of the form 
of mere abstract Rights has come into existence, such as Bank 



2 2 Economics for Beginners. . 

Notes, Bills of Exchange, the Funds, Shares in Commercial 
Companies, Copyrights, Patents, and many other kinds. All 
this kind of Property can be bought and sold, and therefore its 
value is measured in money as precisely as that of any material 
chattel. For this reason it is called in Roman Law Res, Bona, 
Merx : and therefore in Economics "Wealtb. 

We have thus found l/iree distinct orders of Quantities 
which can be bought and sold, or whose value can be measured 
in money : and are consequently "Wealtli : and there are no 
more. There is nothing whatever which can be bought and sold 
which is not of one of these three forms : either it is a material 
thing : or it is some kind of labour or service : or it is an 
abstract right. And all commerce in its widest extent consists 
of the exchanges of these three orders of Quantities. 

Commerce or Economics coiisists of Six distinct kinds 
of Exchange. 

4. As it has now been seen that there are three, and only 
three, distinct orders of Wealth, or Exchangeable Quantities, 
it follows that there are Six distinct kinds of Exchange : these 
are — 

1. The exchange of a Material thing for a Material thing — 
such as so much corn, cattle, or land for so much gold. 

2. The exchange of a Material thing for so much Labour or 
Service — as when gold or silver money is paid as wages, salary, 
or fees. 

3. The exchange of a Material thing for a Right — as when 
lands, houses, cattle, &c., are paid for in Bank notes, bills of 
exchange, cheques. 

4. The exchange of Labour for Labour — as when persons 
agree to exchange one kind of labour or service for another kind 
of labour or service. 

5. The exchange of Labour for a Right — as when wages are 
paid in bank notes. 

6. The exchange of one Right for another Right — as when 



Meaning of ' Property^ 2 3 

a banker buys a bill of exchange, which is a Right, by giving 
in exchange for it a Credit in his books, which is another Right. 
These six kinds of exchange comprehend all commerce in its 
widest extent, and in all its forms and varieties. And they con- 
stitute the great Science of Economics, or the Science which 
treats of the Exchanges of Property. 



On the Meaning of the word Property, 

5. Having found that there arc three distinct kinds of 
Wealth, or Exchangeable Quantities, we have next to find a 
general term which will include them all. This general term 
we shall find in the word Property : and when we understand 
the true meaning of the word Property, it will throw a flood of 
light over the whole of Economics. 

Most persons, when they speak or hear of Property, think of 
some material things, such as lands, houses, cattle, money, &c. 
But that is not the true meaning of Property. The word Pro- 
perty, in its true and original sense, does not mean a material 
thing ; but the absolute Right to use and dispose of something. 

In early Roman jurisprudence the word Mancipiuni was used 
to mean the absolute ownership of anything as well as the thing 
itself ; because it was supposed to be acquired by the strong 
hand, and if not kept with a firm grasp, might probably be lost 
again. 

Afterwards the ownership of things was held to reside in the 
family, or Domiis, but the head of the house, Dommiis^ alone 
exercised all Rights over them. Hence this Right was called 
Domijiuan ; no other member of the family could have any ex- 
clusive Right. Dominiiun, then, became the term in Roman 
Law for the absolute ownership of anything. 

Afterwards, in the time of the early Emperors, the excessive 
rigour of the Patria Potestas was relaxed, and in some cases 
individual members of the family were allowed to have exclusive 
Rights to things : and this right was called Proprietas ; because 
it was restricted to the individual, and excluded everyone else. 



24 Economics for Beginners. 

'■ Dominium id est Proprietas,' says Neratius, a jurist of the age 
of Trajan and Hadrian. 

Proprietas, therefore, in Roman Law meant absolute owner- 
ship, and not the things themselves. 

The word Property was always used in this sense exclusively 
by early English writers. Thus grand old Wycliffe says, 'They 
will have Property of ghostly goods where no Property may be : 
and leave Property in worldly goods where Christian men may 
have Property.' 

So Bacon invariably uses the word Property to mean a 
Right, and not a thing. He says one of the uses of the law ' is 
to dispose of the Property of their goods and chattels.' He 
explains the various methods by which ' Property in goods and 
chattels may be acquired.' 

Property, then, in its true sense means solely a Right, Interest, 
or Ownership : and, consequently, to call material goods Pro- 
perty is as absurd as to call them Right, Interest, Ownership. 
It is quite a modern corruption of the word. 

6. But though Property is a Right, all Rights are not Pro- 
perty. There is an essential distinction between the Right of 
Possession merely and the Right of Property. If I lend my 
friend a book or a horse, he has the Right of possession in these 
things so long as I lend them to him ; but he has not the Right 
of Property in them. 

The Right of Property means the absolute Right to use a 
thing in any way we please : to make a profit by it ; or to sell 
or dispose of it in any way we please. 

Thus when we speak of landed Property, house Property, 
funded Property, literary Property, we mean Rights to land, 
Rights to houses. Rights to payments from the nation, Rights to 
the profits from literary works. 

7. Many words which are usually supposed to mean things 
in reality mean Rights. Thus an Annuity is the Right to de- 
mand a series of payments, and not the sums actually paid : the 



Different Kinds of Property. 25 

Funds are Rights to demand a series of payments from the 
State, and not the money actually paid : Titnss are the Right 
to demand a certain portion of the produce of the earth, and not 
the produce itself : Rent is the Right to demand compensation 
for the use of lands, houses, &c., and not the money actually 
paid. A Debt is the Right to demand a sum of money from a 
person and not the money due : and so on in a multitude of 
other cases. 



On Corporeal or material : Immaterial : and 
Incorporeal Property. 

8. Property being, then, clearly understood to mean a Right, 
there are three distinct kinds of Property — 

1. Material or Corporeal Property. — There may be Pro- 
perty in some material physical substance, which is already in 
existence, and has come into possession of the Proprietor, like 
lands, houses, money, &c. 

2. Immaterial Property. — A man has the Right to the use 
of his own faculties, abilities, energy, and to the profits to be 
reaped by them. This is called Immaterial Property by the 
French Economist J. B. Say. 

3. Incorporeal Property. — We may have a Right wholly 
severed from any specitic corp2ts, or matter in possession. It 
may not even be in existence at the present time. Thus those 
who possess lands, fruit trees, cattle, &c., have the Property in 
their future produce. Though the produce itself will only come 
into existence at a future time, the Property or Right to it when 
it does come into existence is present, and may be bought and 
sold like any material chattel. 

Or the thing may be in existence, but it may be some one 
else's Property at the present time ; and only come into our 
possession at some future time. Thus we may have the Right 
to demand a sum of money from some person at some future 
time. That sum of money may, no doubt, be in existence, but 
it is not in our possession : it may not even be in the possession 



26 Economics for Beginners. 

of the person who is bound to pay it. It may pass through any 
number of hands before it is paid to us. But yet our Right 
to demand it is present and existing, and we may sell and 
dispose of it exactly as if it were a material chattel. Hence it 
is Property ; but it is called Incorporeal Property in Roman 
and English Law, because it is a mere abstract Right, wholly 
severed from any specific substance. 

Hence it is seen that the word "Wealth, or an Economic 
Quantity, means an Excbang-eable Rig-ht : and that all ex- 
changes are of Rights against Rights. When we exchange so 
much corn for so much gold, we exchange the Right to so 
much corn for the Right to so much gold ; and so on for all 
other species of exchanges. 

On the Application of the Positive a7id XiTeg-ative Signs 
*o Property. 

9. Economic Quantities, or Economic Rights, are, then, of 
three species— 

1. Property in some material substance which has already 
been acquired. 

2. Property in ourselves, our talents, and abilities. 

3. Property in something which is only to be acquired at 
some future time. 

Now, we can absolutely part with and devest ourselves of the 
Property in material substances, or the first order of Economic 
Quantities. 

In exchange for some reward we can transfer to some one 
else the Right to make use of our intellectual qualities or 
services on a special occasion. But though we may receive a 
reward for exercising our faculties in some person's service, we 
do not part with them : we may sell our knowledge, but it is 
not gone away from us. Like a candle which communicates 
light to others, it does not diminish our own light : a man may 
sell his instruction, but it does not diminish his own store. 

The third species of Economic Quantities, or Rights, are 



* Jura in Rem ' and ' Jura in Personam' 2/ 

invisible and intangible, like the second species ; but they are 
transferable, like the first ; and when we exchange or sell them, 
we devest ourselves absolutely of our Property in them, as we 
do of the first species. 

Now, we observe that the two species of Property of which 
we can absolutely devest ourselves are Inverse to each other. 
Property, like Janus, has two faces, placed back to back. It 
regards the past and the future, and is therefore of Opposite 
qualities. Now, in all physical and mathematical sciences it is 
invariably the custom to denote similar quantities but of 
opposite qualities by opposite signs. Hence, as a matter of 
simple convenience, and following the usual custom in physical 
science, if we denote one of these kinds of Property as Positive, 
we may, as a distinguishing mark, denote the other as Negative. 

Thus if we denote Property in a product which has been 
acquired as Positive, it is perfectly consonant with the universal 
practice in physical philosophy to denote Property in a product 
that is to be acquired as STeg-ative. 

Now, Property in a thing which has been acquired is Corpo- 
real Property, and Property in a thing which is to be acquired 
is Incorporeal Property. Hence, if we denote Corporeal Property 
by the Positive Sign, it is strictly in accordance with all physical 
philosophy to denote Incorporeal Property by the Negative Sign. 

And as in all mathematical and physical sciences the whole 
science comprehends both Positive and Negative Quantities, so 
the whole Science of Economics comprehends both Positive 
and Negative Economic Quantities, both Corporeal Property 
and Incorporeal Property. 

On the Distinction between the Jus in rem or in re and 
the Jus ad rem, or the Jus in Personam. 

10. We must now notice another division of Property of 
great importance. 

Property is of two kinds — 

I. Property in a specific chattel, termed a Jus in rem or in 



28 Eco7ioinics for Beginners. 

re in Roman Law, without being related to any one else ; called 
also Dommiujn. When a person has such a sole and exclusive 
Right in anything, he may sell or transfer it to anyone else in 
any way he pleases. Money is subject to this sort of Property: 
and hence a man may freely sell and transfer his own money, 
or any other chattel. 

2. Property held in Contract, or Obhgation, called in Roman 
Law Jus ad 7-em or Jiis in Personam, where a person has a 
Right, but not to any specific thing, but only against a Person 
to pay or do something. 

But Property held in Contract is of two kinds — 

a. Where each party has Rights to receive and Duties to 
perform : such as the A'cxian, or Obligation, between Lord and 
Vassal in feudal law : or that between Master and Servant at 
the present time. This is termed a Bilateral or Synallagrmatic 
Contract. 

b. Where there is only a Right to receive on one side and 
a Duty to perform on the other : such as the relation between 
Creditor and Debtor or Landlord and Tenant in modern times. 
This is called a Unilateral Contract. 

Formerly it was held universally th it wherever Property was 
held in Contract of either sort, neither party could substitute 
another person for himself, at his own will and pleasure, and 
without the consent of the other party to the contract. 

This rule must manifestly hold good in all Bilateral 
Contracts : because as each side has a Duty to perform, of 
course the person who has that Duty to perform cannot sub- 
stitute anyone else to perform it without the consent of the 
other party. 

Thus so long as the feudal law retained its pristine rigour 
neither the Lord nor the Vassal could substitute anyone else 
for himself without the consent of the other party. So in the 
case of Master and Servant at the present day : a master can- 
not transfer his household to anyone else without their own 
consent, as if they were cattle or slaves. Neither can a servant 
substitute anyone else in his place without his master's consent. 



Transfer of Debts, 29 

The same principle originally held good when the contract 
was unilateral, as in the case of Creditor and Debtor. The 
Creditor could not transfer his Right of action against the 
Debtor, because the Debtor never agreed to pay anyone except 
his own Creditor. It is a rule of law and common sense that 
no man can contract for another without his consent. Unless, 
therefore, the Debtor had agreed with the Creditor that he 
might transfer his right, the Creditor had no power to guarantee 
his Transferee that the Debtor would pay him. Accordingly, 
both in Roman and English law, for a long period, the Creditor 
could not transfer his Right of action against his Debtor with- 
out the Debtor's consent, so as to enable the Transferee to sue 
the original Debtor. 

But nevertheless, though this may be true in theory, the 
party in an Obligation of this form who has the Right to demand 
soon begins to insist upon the power of transferring this Right 
like any other Property. And there is a very good reason for 
this ; for in the Obligation or Contract of Debt there is 
manifestly a strong distinction between the two parties, the 
Creditor and the Debtor. The Debtor cannot substitute another 
Debtor for himself, because the Creditor may not have the 
means of knowing the solvency of the substituted Debtor. 
Therefore, by the very nature of things, the consent of the 
Creditor is indispensable to the substitution of a new Debtor ; 
as, for instance, no one can compel his Creditor to take payment 
of a Debt in the notes of a country banker. But the case of the 
Creditor is different. If a person really owes a Debt and has 
the means of paying it, it cannot make the slightest difference 
to him whether he pays it to A or to B^ provided he can get a 
discharge for it, and is not called upon to pay it twice over. 
Hence while the assignment of a new Debtor might seriously 
prejudice the Creditor, the assignment of a new Creditor can be 
no real prejudice to the Debtor. 

In A.D. 224 the Emperor Alexander Severus enacted that a 
Creditor might sell his Right of action without the knowledge 
and without the consent of the Debtor : and ever since then all 



30 Economics for Begimiers. 

actions of every sort have been as freely saleable as any material 
chattel on the Continent. By a recent Act this principle has 
been adopted in England, and on November i, 1875, the sale 
of Debts became absolutely free in England. 

On Property as * Goods and Cbattels. 

11. We have seen that Property, including abstract Rights 
of all sorts, is included under the titles of Pecunia, Res, Bona, 
Merx, in Roman Law, because it can all be bought and sold. 
For the same reason abstract Rights are included under the 
terms * Goods,' 'Goods and Chattels,' 'Chattels,' 'Vendible 
Commodities,' in English law. 

Thus Blackstone says, ' For it is to be understood that in 
our law chattels (or goods and chattels) is a term used to express 
any Property which, having regard either to subject-matter or 
the quantity of interest therein, is not freehold. 

' Property or Chattels personal may be either in possession 
or else in action^ . . . Property-in-action is where a man has 
not the enjoyment (either actual or constructive) of the thing in 
question, but merely a Right to recover it by a suit or action 
at law.' 

Thus all such Property as Debts, Bank Notes, Bills of 
Exchange, the Funds, Shares in Commercial Companies, 
Copyrights, &c., are ' Goods and Chattels ' in English Law, 
just as much as any material chattels. 

Definition of Value. 

12. If at any time any Economic Quantity A can be 
exchanged for any Economic Quantity B, then the Quantity A 
is termed the Value of B in terms of A ; and B is the Value of 
A in terms of B. Suppose that at any time one ounce of gold 
will exchange for fifteen ounces of silver, then it is said that one 
ounce of gold is of the Value of fifteen ounces of silver, which is 
this equation — 

I oz. gold=i5 oz. silver. 



On Money and Credit. 3 1 

As Aristotle says, ' Now, the term Value is used in reference 
to External goods.' And it is said in Roman Law, ' The 
Value of a thing is what it can be sold for.' We may therefore 
say — 

The Value of any Econoinic Qicantify is any other Economic 
Quantity for which it can be exchanged. 

Now, as any Economic Quantity can be exchanged for any 
other, any Economic Quantity may have Value in terms of any 
of the others : and an Economic Quantity has as many Values 
as Quantities it can be exchanged for : and if it can be exchanged 
for nothing it has no Value. 

On T/Loney and Credit. 

13. In the primitive ages of the world there was no such 
thing as Money. Traders exchanged their products directly 
with one another. This exchange of products is termed Barter. 
The inconveniences of this mode of trading are palpable. It 
would give rise to endless disputes to determine how much of 
one product should be given for another. Some ingenious 
person would then discover that it would greatly facilitate 
traffic if the things to be exchanged . were referred to some 
common measure. In the ' Ihad ' and 'Odyssey' there aie 
several passages in which things are estimated as being worth 
so many oxen. This does not imply, however, that these oxen 
served the purpose of Money. The state of barter continued, 
as it is quite common at the present day to exchange goods 
according to their value in money, without the use of actual 
money. 

The necessity for Money arises from a different cause. As 
long as the things exchanged were equal in Value there would 
be no need for Money. But it would often happen that when 
one person required some product or service from his neighbour, 
that neighbour would not require an equal amount of product 
or service from him at the same time, or perhaps even none at 
all. If, then, a transaction took place with such an tmequal 



32 Econo7nics for Begimiers. 

result, there would remain a certain amount or difterence of 
product or service due from the one to the other, and this would 
constitute a Debt — that is, a Right, or Property, would be created 
in the person of the Creditor to demand this balance of product 
or service at some future time ; and at the same time a Duty- 
is created in the person of the Debtor to pay the product, or 
render the service, when required. 

Among all persons who exchange this result must inevitnbly 
happen : persons want something from others when those others 
want nothing from them. And it is easy to imagine the in- 
conveniences that would arise if persons never could get any- 
thing they wanted, unless the person who could supply these 
things wanted something in return at the same time. 

In process of time all nations hit upon this plan : they fixed 
on some Material Substance, which they agreed to make always 
exchangeable among themselves, to represent the amount of 
Debt. 

Suppose a wine-dealer wants a quantity of bread from a 
baker : but the baker wants only one-half the equivalent 
quantity of wine from the wine-dealer, or perhaps even none at 
all. 

The wine-dealer takes the bread from the baker and gives 
him in exchange as much v/ine as he wants, and makes up the 
balance by giving an amount of this generally exchangeable 
merchandise : or if he wants no wine at all, the wine-dealer 
gives him the full Value or equivalent of the bread in this 
merchandise. 

The baker perhaps wants shoes and meat, but not wine. 
Having received this merchandise from the wine-dealer, he 
goes to the shoemaker or butcher, and obtains the equivalent 
of the product he sold to the wine-dealer in the form of shoes 
or meat. 

Thus is seen the fundamental nature of ivioney, as this gene- 
rally exchangeable merchandise is called. Its especial and 
particular purpose is to represent the Debts that arise from 
unequal exchanges among men, and to enable persons to ob- 



Nature of Money. 3 3 

tain the equivalent of the service they have done to one person 
from some one else. 

Thus the true nature of Money is to be a Rigrht or Title to 
demand something from some one else. Many writers have 
seen that this is the true nature of Money. Thus Aristotle says 
that Money is our Security that we may get something when 
we do want it, if we want nothing at present. Baudeau, one of 
the most eminent of the first school of Economists, says, 
* This coined Money in circulation is nothing but effective Titles 
on the general mass of useful and agreeable enjoyments. It is 
a kind of Bill of Excbangre or Order payable at the will of the 
bearer.' So Smith says, 'A guinea may be considered as a 
Bill for a certain quantity of necessaries and conveniences upon 
all the tradesmen in the neighbourhood.' Henry Thornton, the 
eminent banker, says, ' Money of every kind is an Order for 
goods.' So Mill says, ' The pounds or shillings which a 
person receives weekly or yearly are not what constitute his 
income : they are a sort of Ticket or Order which he can pre- 
sent for payment at any shop he pleases.' 

Thus all these writers — and many more might be cited if our 
limits allowed us — have seen the true nature of Money. Dif- 
ferent nations have used different substances to represent this 
universal want. Silver, copper skewers, carved pebbles, shells, 
blocks of tea, salt, dates, dried cod, sugar, tobacco, nails, powder 
and shot, logwood, belts of wampum, and many other things 
have been used for this purpose. But there is no substance 
which has so many advantages as a Metal : and of metals Gold 
and Silver are superior to any others, as they can be kept for 
any length of time without deterioration. 

14. Now when persons take a piece of money in exchange 
for products or services, they can neither eat it, nor drink it, 
nor clothe themselves with it. They can make no direct use of 
it : they only take it because they believe they can exchange it 
away again for other things which they do require. It is there- 
fore what is called Credit; as Edmund Burke says of gold 

D 



34 EconoTnics for Beginners. 

and silver, * the two great recognised species that represent 
the lasting conventional Credit of mankind.' 

Credit is therefore the Ri^ht or Property of demanding 
something from some one else. It is the Rigriit to a future pay- 
viejit ; it is the Name of a certain species of Right or Property. 
Gold and silver money may be called Metallic Credit. 

15. So long as nations continue in a low state of civihsation 
all this Credit, or Money, is of some material substance ; but 
when they advance in civilisation they use Credit of another 
form. To revert to the case from which we showed how the 
necessity for Money originated — that of an unequal exchange — 
suppose that the Debtor, instead of the general merchandise 
called Money, gave the Creditor a simple Promise to pay the 
balance of product or services when required. Then the 
Creditor has only the Right to demand an equivalent in future 
from his own Debtor. Now, it is this abstract Right to demand 
something which in Law, Commerce, and Economics is termed 
Credit. But it is only a Right against a particular person. 
Suppose, for instance, that a person holds a tea merchant's pro- 
mise to pay five pounds of tea. The Creditor may sell or 
transfer that Right to anyone else. Suppose he happened to 
want bread and the baker happened to want tea, the Creditor 
might sell the Right to demand tea in exchange for so much 
bread. Now, that Right is only to demand a particular thing, 
and only from a particular person : and that person may die 
or become insolvent, and may not be able to fulfil his promise. 

Hence the Value of the Promise is pa7-ticular and precarious. 
But if the tea merchant can fulfil his promise that promise is of 
the Value of the tea. The tea is the Value of the promise, 
and to anyone who wants tea the Promise is of exactly the 
same Value as so much Money. So if anyone wants anything, 
an Order for that thing is of the same Value to him as Money 
with regard to that particular thing. Such an Order, or Pro- 
mise, of course has only one Value, whereas Money has a multi- 
tude of Values. And if the person who has given the Promise 



On Sale or Circulation. 3 5 

cannot fulfil it, the Promise has lost its Value. Such an Order 
has therefore only particular audi precarious Value, but Money 
has general and permanefit Value. 

Such an Order, or Promise, which is Credit, although of an 
inferior and lower form, is yet of the same general nature as 
Money. And because such Orders or Promises can be bought 
and sold like any material chattels, they are called Pecujiia, 
Res J Bona, and Merx in Roman Law, and ^ goods and chattels ' 
in English Law. 

It thus appears that it is quite possible to carry on the ex- 
changes of society without material money. During the late 
civil war in America gold and silver money entirely disappeared 
from circulation, and private tickets of the nature just described 
took its place. Instead of Money people had their pockets 
filled with bread tickets, milk tickets, railroad tickets, &c. 

These Orders, or Promises, when recorded on paper, are 
called Paper Credit. In its simplest form it would have the 
particular service or product it was intended to command stated 
on the face of it. But it is found more generally convenient to 
make Paper Credit a promise to pay Metallic Money. But 
from what has been said it is clear that Credit is the Right to 
demand something from a particular person, and that Money is 
a general Right to demand anything from the commercial com- 
munity. Hence it is clear that Money and Credit are homo- 
geneous quantities, and that Money is the highest and most 
g-eneral form of Credit. 



On Sale or Circulation. 

16. When commodities are exchanged directly with one 
another it is called Barter. When commodities are exchanged 
for Money, that Money is only taken in order that it may be 
exchanged away again for something else. Hence Say aptly 
said that when Money is used the transaction is half-an-exchange. 
It is also called a Sale or Circulation. Sale, or Circulation, 
always means a transaction in which one of the quantities, or 

D 2 



36 Economics for Beginners, 

sometimes both the quantities, exchanged is Money or Credit. 
An exchange is always an interchange of things of a hke nature, 
as products for products, or Money or Credit for Money or 
Credit. Thus we speak of the 'change or exchange of a Bank 
Note or Cheque for Money : or of exchanging a picture for a 
statue, or one book for another. When a person gives Money 
or Credit for a commodity he is said to Buy it ; and the one 
who gives the commodity to Sell it. Thus we buy a horse or a 
house with Money. Formerly an officer bought a commission 
in the army ; but he exchanged from one regiment to another. 
In ' Hamlet' Laertes says — 

Exchange forgiveness with me, noble Hamlet. 

The sum total of transactions in which Money or Credit is 
used is properly termed the Circulation. 



On the Meaning (t/* Circulating- Medium. 

17. The term Circulatlngr Medium does not occur in 
Smith. It came into use in the last decade of the last century ; 
but there is no difficulty as to its meaning. 

It has just been explained that transactions in which Money 
and Credit are used are called Sales or Circulation. Now the 
Circulating Medium is the Medium by which Sales or Circula- 
tion are effected : and, from what has just been said, the Cir- 
culating Medium is simply Money and Credit in all its forms 
and varieties. 

On the Meaning of Cwtvenny, 

18. There is, however, somewhat more difficulty about the 
meaning of the word Currency, which is always used as synony- 
mous with Circulating Medium : it is originally a term of Mer- 
cantile and Constitutional Law. 

The following is the meaning of the words ' Current ' and 
• Currency ' in English Law : — 



Meaning of ^ Currency! 37 

It is a general rule of English Law that a person cannot 
transmit to another any better title to a thing than he possesses 
himself. It is also a rule of law, that if a person has lost a 
thing, or has it stolen from him, he does not thereby lose his 
Right or Property in it. Consequently he can not only recover 
it from the finder or thief himself, but even if the finder or thief 
has sold it to some one else, who has given a full price for 
it, and buys it quite honestly and without knowing that it was 
not the property of the seller. The only exception to this 
was, if the finder or thief sold the goods in 'market overt.' If 
the goods were bought in 'market overt,' the buyer might 
retain them against the true owner even if they were stolen. 

But to this rule of English law Money was always an excep- 
tion. If the true owner of Money finds it in the hands of the 
thief, he can recover it : but if the thief or finder has purchased 
goods in a shop with it ; and the shopkeeper takes it honestly in 
the way of business, and without knowing that it has been 
stolen, he may retain it against the true owner from whom it has 
been stolen, even if he can identify it. That is, the Property in 
it passes by delivery. 

It is this peculiarity in the law affecting the Property in 
Money which passes by delivery which is denoted by the word 
* Currency.' 

And when the representatives and substitutes for Money, 
such as Bank Notes, Bills of Exchange, Cheques, and other 
Securities for Money, came into use, the Lex Mercatoria, or 
custom of merchants, applied the same doctrine or principle of 
Currency to them. They were treated like Money in so far as 
this, that the Property in them passed like the Property in 
Money. Thus, if they were stolen, the true owner might recover 
them if he found them in the possession of the thief : but if the 
finder or thief had passed them away for value in the usual 
course of business to an innocent holder, that innocent holder 
acquired the Property in them, and might retain them against 
the true owner, and enforce payment of them from all the 
parties liable. Thus Bills of Exchange, Bank Notes, Cheques, 



^S Economics for Beginners. 

and al] other Securities for Money were assimilated to Money 
in this important respect, that, even though stolen, when they 
had once been passed away * in Currency ' the Property in them 
belonged to the person who had innocently purchased them : 
and, as Lord Mansfield said, no action would lie for them after 
they had crnce been paid away ' in Currency.' 

It is thus seen that in strict law the word Currency can 
only be applied to those Rights which are recorded on some 
material. An abstract Right cannot be lost, mislaid, stolen, and 
passed away in commerce. For a Right to be Currency in 
strict law it must be recorded on some material, so as to be 
capable of being carried in the hand, or put away in a drawer, 
or dropped in the street, and stolen from the drawer, or from a 
man's pocket, and carried off by the finder or thief, and sold 
like a piece of goods. 

So far, then, as regards law, there is no difficulty : the 
meaning of the word is perfectly plain. But if the word 
Currency is used to denote a certain class of Economic Quanti- 
ties, synonymously with Circulating Medium, a difficulty arises : 
because there is an immense mass of Credit which has produced 
exchanges, and is therefore Circulating Medium, which is not 
recorded on any material substance, so that it can be lost or 
stolen, and passed away by manual delivery. 

Thus the gigantic mass of Bank Credits and Book Debts of 
traders have effected a sale or circulation of commodities, and 
therefore they are all Circulating Medium ; but they are not 
Currency in a legal sense, because they cannot be mislaid, or 
lost, or stolen, and passed away by manual delivery. But 
though these Book Credits are not Currency in point of law, 
they must be included in that word when used as a scientific 
term in Economics, synonymous with Circulating Medium, 
because these Rights of action are exactly the same in their 
nature and effects, whether they are recorded on paper or not. 
This truth was well expressed by the Marquis of Titchfield in 
the House of Commons, in speaking of various forms of Credit 
used as substitutes for money : — ' When it was considered to 



On Price^ Discount, and Interest, 39 

how great an extent these contrivances had been practised in 
the various modes of Verbal, Book, and Circulating- Credits, 
it was easy to see that the country had received a great addition 
to its Currency. This addition to the Currency would of 
course have the same effect as if gold had been increased from 
the mines.' 

19. Adopting, then, this definition, we may enumerate the 
different species of Currency, or Circulating Medium, as 
follows : — 

1. Coined Money : Gold, Silver, and Copper. 

2. The Paper Currency : Bills and Notes in all their va- 
rieties. 

3. Simple Debts of all kinds not recorded on circulating 
paper ; such as Credits in bankers' books, called Deposits ; 
Book debts of traders ; and private Debts between individuals. 

All these denote that a transfer has taken place, and are a 
Title to future payment. It is true that some species are more 
eligible and secure than others, but that does not alter their 
nature : they all represent the same fundamental idea — Bebt. 
Hence it follows that the amoimt of Currency, or Circulating 
Medium, in any country, is the total of all the Debts due to 
every individual in it — that is, all the Money and Credit in it. 

On Price, Discount, and Interest. 

20. When any Economic Quantity is exchanged for an- 
other, each is termed the Value of the other. But when one 
of the Quantities exchanged is Money or Credit, the sum of 
Money or Credit receives a pecuhar name : it is termed Price. 
Price is therefore always the Value of anything expressed in 
Money or Credit. Now, as the Value of Money or Credit is the 
greater as more of any commodity can be obtained for it : or 
if the quantity of the commodity be taken as fixed, the Value of 
Money is greater as less Money is given for the commodity, it 
follows that the Value of Money varies iiiversely as Price. 



40 Economics for Begimters 

Debts or Credits are commodities, and, like other com- 
modities, they must be divided into certain units for the con- 
venience of sale. Coals are sold by the ton : other things by the 
pound : others by the ounce. The unit of Debt is the Right to 
demand loo/. to be paid one year hence. The sum of Money 
or Credit paid to buy this unit is its Price : and the smaller the 
Price given the greater is the Value of Money. But in the 
commerce of Debts it is not usual to estimate the Value of 
Money by the Price of the Debt. The Price of the Debt is of 
course less than the amount of it : and the difference between 
the Price of the Debt and its amount is the Profit made by 
buying it. This Profit is called Discount. And it is clear 
that, as the Price of the Debt decreases, or increases, the 
Discount or Profit increases or decreases. In the commerce 
of Debts it is always usual to estimate the Value of Money by 
the Discount or Profit it yields. Hence, in this latter case the 
Value of Money varies directly as Discount. 

Hence it must be observed that in commerce the expres- 
sion 'Value of Money' has two meanings, according as it 
is applied to buying commodities or debts : in the former case 
it means the quantity of the commodity bought, in the latter it 
means the profit made by buying the debt ; and accordingly we 
have this rule — 

The Value of Money varies inversely as Price, and directly 
as Discount. 

To discount a bill at 5 per cent, means to give a price for the 
debt in the proportion of 95/. for every 100/. of its amount, 
payable one year hence. 

When a person advances Money to another, and agrees to 
defer receiving the profit till the end of the period, the profit is 
termed Interest. If he lends 100/. for a year at 5 per cent, 
interest, he pays down 100/., and buys the Right to demand 105/. 
at the end of the year : and the 5/. is the Interest. 

When the profit is retained at the time of the advance it is 
termed Discount. In this method the lender advances 95/., and 



On Supply and Demand. 41 

buys the Right to demand 100/. at the end of the year. This is 
the method always adopted by bankers in making advances. 

It is clear that Discount is more profitable than Interest, 
because in the former case the lender gains 5/. on the advance 
of 95/., in the latter case on the advance of 100/. : and besides 
that he has the projfit to trade with at once, instead of waiting 
till the end of the year for it. 

The Rate of Interest or Discount is the amount of Interest 
or Discount made in some given time, as a year. 

O71 Production and Consumption ; 07' Supply and Demand. 

21. The terms Production and Consumption were invented 
by the first school of Economists, and must always be taken 
together. 

Production comes from the Latin word Producere, which 
means to draw forth and place on a given spot : or to offer for 
sale. Thus Terence says — 

Pretium sperans illico 
Producit: vendit. 

Hoping for a good price offers her therefor sale : sells her. 

To Produce, then, in Economics means to bring any com- 
modity into the market and offer it for sale. The Producer, in 
the language of commerce, is the person who offers anything 
for sale. 

The first school of Economists restricted the term Wealth to 
the material products of the earth, and they expressly defined 
Production to mean the obtaining the raw produce from the 
earth and bringing it into the market for sale. 

Consumption [Consonunation) was used by the same school 
of Economists to mean finally purchasing a commodity, and 
taking it out of the market for use and enjoyment. It is 
derived from the French word Conso7n?7ter, which comes from 
the Latin Constmtmare, to complete or finish. Conso7n7nation 
meant the completion of an exchange. When one person, for 



42 Economics for Beginners. 

instance, exchanged a picture for a statue with another person, 
each obtained a satisfaction ; and this the first school of Econo- 
mists called a complete exchange. Hence the Consumer was 
simply the Purchaser or the Customer. In the language of 
commerce the Consumer means the Buyer. 

Thus the expression Production and Consumption means 
simply Exchange. 

So long as the term Wealth was restricted to mean the 
material products of the earth only, there was no awkwardness 
in the terms Production and Consumption. But when the 
second school of Economists treated Labour as a marketable 
commodity, or Wealth, and when the third School of Eco- 
nomists treat Rights as marketable commodities or Wealth, 
very considerable awkwardness arises. For even though it is 
expressly explained that Production means nothing but offering 
for sale, and that Consumption means nothing but buying or 
purchasing, it is very awkward to speak of the Production and 
Consumption of Labour and Rights. 

Under these circumstances it is better to resort to words of 
wider import : and these we have in the words Supply and 
Bemand. Production, or the quantity produced and offered 
for sale, is the Supply ; the quantity bought or consumed is 
the Demand. It is quite usual to speak of the Supply and 
Demand of Labour, or the Supply and Demand of Bills of 
Exchange or Debts. And the terms Supply and Demand to- 
gether constitute Exchange. 

Hence while the terms Production and Consumption were 
never intended to apply to anything but the material products 
of the earth, the terms Supply and Demand apply to the ex- 
changes of all the three kinds of exchangeable quantities. 

On the Three Ki7ids of Production, 

22. Production being explained to mean placing a com- 
modity in the market and offering it for sale, there are various 



On Profit. 43 

kinds of operations which are necessary to and are included in 
the term Production — 

1. Some persons obtain the raw produce from the earth, 
such as tillers of the ground, miners, hunters, fishers, «&c., and 
bring it into commerce : these are termed Agricultural Pro- 
ducers. 

2. Other persons transform this raw produce by an infinity 
of processes, and render it fit for human use : these are termed 
Manufacturing Producers. 

3. Other persons transport the commodity from places where 
it is cheap and less required to other places where it is dear 
and more required : these are termed Commercial Producers. 

All these various kinds of Producers may be necessary to 
place any required commodity in the market where it is ulti- 
mately offered for Consumption or final purchase. 

On Cost of Production. 

23. Production being the placing any commodity in the 
market and offering it for sale, the Cost of Production is the 
sum actually expended in placing it in the market where it is 
offered for sale. 

On Profit. 

2A, The Cost of Production being the sum actually expended 
in placing any commodity in the market where it is offered for 
sale : the sum for which it is sold is its Value : and the 
Difference between the Cost of Production and the Value is 
termed Profit. 

The Value may exceed or fall short of the Cost of Pro- 
duction : when the Value exceeds the Cost of Production, the 
Profit is Positive, and is termed a Gain ; when it falls short of 
the Cost of Production the Profit is Negative, and is termed a 

&OSS. 



44 Economics for Beginners. 

The Rate of Profit is the amount of Profit made in some 
given time, as a year. 

On Productive and Unproductive l^abour. 

25. The term Productive Labour was used by the first 
school of Economists to denote Labour which produced a Profit 
after defraying the Cost of Production ; and to use a thing 
Productively meant to use it so as to produce a profit. 

Unproductive Labour was Labour which produced no Profit 
after defraying the Cost of Production. 

On Rent and Hire. 

26. Exchanges in commerce are of two sorts : one where 
the absolute Property in the thing is purchased, or the Right to 
it for ever : the other where only the Right to use it for a limited 
period is purchased. 

When the Right or Property in the thing for ever is pur- 
chased, the sum given is called its Price ; when the Right only 
to use it for a limited period is bought, the sum given is called 
Rent or Hire. 

In general the word Rent is used when the sum given is 
made in a series of payments for continuous use ; the word 
Hire is generally used when the sum is given in a single pay- 
ment. 

Thus a person may purchase the use of a farm, or a house, 
or a die, or a Copyright, or a Patent, or a Telegraph wire, or a 
Frame, for a certain time and make a series of payments for 
their use : these payments are always called Rent ; or rather 
the Right to demand them is the Rent. Formerly the Right to 
demand a series of payments for the loan of Money was also 
called Rent : this name is not usually applied in Enghsh now 
to such payments, but it continues in use in French : thus the 
French Funds are called Rentes ; and a fundholder is called 
a Rentier. 



On Capital. 45 

When the sum is given in a single payment it is usually 
called Hire : thus a person hires a horse for the day : or hires 
a cab : or a porter. 

There is, however, no absolute rule on the subject : if horses 
and carriages were hired by the year, the sum paid would be 
called Hire and not Rent : and the sum paid for lands and 
houses is called Rent, even though there be only one payment 
made. 

On Capital. 

27. Any Economic Quantity whatever may be used in two 
different ways : (i) It may be used for personal enjoyment ; 
(2) It may be used for the purpose of profit, or it may be traded 
with. When any Economic Quantity is traded with, or used so 
as to produce a profit, or, in the language of Economics, used 
productively, it is termed Capital. 

Thus Senior says, ' Economists are agreed that whatever 
gives a profit is properly termed Capital.' And De Fontenay 
says, ' Wherever there is a Revenue you perceive Capital.' The 
definition of Capital is, therefore — 

Capital is atty Economic Quaiitity tised for the purpose of 
Profit. 

1. Any material thing may be used as Capital. Money spent 
upon household requirements or in gratifying personal tastes is 
not Capital. But if it is lent out at interest : or expended in 
buying goods with the intention of selling them again with a 
profit, then such money is used as Capital : and the goods are 
also Capital, because they are intended to be sold with a profit. 
So land let out for the purpose of profit is Capital. 

2. All modern Economists — Smith, Say, Senior, Mill — class 
personal abilities, skill, energy, and character as Capital, because 
they may be used so as to produce a profit as well as any ma- 
terial chattel. 

If a man digs in his garden for his own amusement ; or if 
he sings, or acts, or gives lectures to his friends gratuitously, 
such Labour is not Capital. 



4^ Economics for Beginners. 

But if he sells his Labour in any capacity for money — such 
as a ploughman, an artisan, a physician, an engineer, an ad- 
vocate, or in any other way — such Labour is Capital. Any 
exertion of human abilities in any way which is paid for is 
Labour : and a person can make an income by the exertion of 
his personal abilities, which is measurable and taxable, just as if 
he made an income by selling goods. Such Capital is called 
by J. B. Say Immaterial Capital. 

But a man may use his personal character, skill, energy, 
and probity for the purpose of profit in another way besides the 
direct exchange of his Labour for money. 

He may use them for the purpose of buying goods, materials, 
and by giving his Promise to pay at a future time, instead of 
actual payment in money, with the intention of selling those 
goods with a profit. In popular language, this Purchasing 
Power of Character is called Credit. And a trader makes a 
profit by trading with his Credit precisely in the same way as if 
he traded with Money. 

A merchant's general Credit, or Purchasing Power, does not 
come into Economics until he actually makes some purchase 
with it, and then he gives his Promise to pay for the goods, 
instead of actual Money. It is this Promise to pay, this Debt 
or Right to demand payment, which is the Economic Quantity 
called Credit ; and it may be bought and sold like any material 
chattel. 

3. So any other Economic Quantity or Right may be used 
as Capital. If an author writes a successful work, the Copy- 
right of it is Capital to him : and if a publisher buys the copy- 
right it is Capital to him. There is a class of traders whose 
business it is to buy and sell Rights of various kinds — the Funds, 
Obligations, and Shares in Commercial Companies. They keep 
a stock of this Property on hand, just as other traders keep a 
stock of material goods. 

It is, therefore, to be observed that there is no such thing as 
absolute Capital : it entirely depends upon the way in which a 
thing is used, whether it is Capital or not. As Mill says, whether 



How Capital Increases. 47 

a thing is Capital or not does not depend upon its own nature, 
but upon the ?mnd of its owner. A piece of money may be 
used as Capital in one exchange, and not as Capital in the next 
exchange, if in the first it is meant to be replaced with a profit, 
and in the next it is used for personal enjoyment. 



Capital fnay increase in two ways. 

28. Capital may increase in two distinct ways — 

1. By actual increase of quantity : flocks and herds, and all 
fruits of the earth, increase by adding to their number or 
quantity. 

2. By exchange : that is, by exchanging something which 
has a low value in a place for something which has a higher 
value : that is, by commerce. 

Money becomes Capital, or produces a profit, by the second 
of these methods. It is exchanged for some goods or labour, 
the produce of which may be sold or exchanged again for a 
greater sum than they cost. 

Credit is used as Capital precisely in the same way : namely, 
by buying goods which may sell for more than they cost, so 
that, after discharging the Debt incurred by their purchase, 
there may be a profit over. 

Suppose a merchant buys goods with 100/. in money, and 
sells the goods for 125/. ; then he is better off at the end of the 
operation by 25/. than at the beginning. 

Suppose that he has no Money and no Credit ; he can buy 
no goods and make no profit. 

Suppose, however, that the owner of the goods, trusting to 
his character, probity, and skill, sells him the goods in exchange 
for his Promise to pay at a future time. As the payment is 
deferred, and there is some risk, the merchant must pay a 
higher price in Credit than in Money. 

Suppose he has to pay 105/. in Credit. Then, as before, he 
sells the goods for 125/. He has to discharge the Debt of 105/. ; 
and after paying that he has a Profit of 20/. over. That is, he 



48 Economics for Beginners, 

is 20/. better off at the end of the operation than he was at the 
beginning. 

Now, by the cash operation he is better off by 25/., and by 
the Credit operation he is better off by 20/., than he was at the 
beginning. It is true he does not make so great a profit by 
Credit as by Cash. But yet he has made a profit by his Credit 
which he could not have made without it. Hence by the very 
definition his Credit has been Capital to him, and has produced 
exactly the same circulation of commodities that Cash would 
have done. Hence we see that Credit is Productive Capital in 
exactly the same way and in the same sense that Money is. 

On Fixed mtd Floating: Capital. 

29. It is, then, distinctly to be understood that there is no 
such thing as absolute Capital. It depends entirely upon the 
intention and method of use whether a thing is Capital or not. 

But Capital itself may be used in two different ways so as 
to produce a profit — 

1. The CapitaHst may retain it in his own possession, and 
make a continuous series of profits by its use ; in this case it is 
called Fixed Capital. 

2. The CapitaHst may part with it entirely, and replace the 
entire value of the Capital with the profit in one operation : in 
this case it is called Floating: Capital. 

It is clearly to be understood that it is according to the 
intention of the person who produces an article, and the purpose 
for which it is used, that it receives either of these names. The 
same article may be Floating Capital in the hands of one man, 
and Fixed Capital in the hands of the next possessor, if the first 
produces it for the purpose of selling it, and the second pur- 
chases it for the purpose of deriving an income from its use. 

This distinction is often overlooked, and the term Fixed 
Capital is applied to articles of a certain nature, and Floating 
Capital to articles of another nature. Thus Smith enumerates 
four species of Fixed Capital : (i) useful machines and instru- 



On Fixed and Floating Capital. 49 

ments of trade ; (2) Buildings used in all sorts of trades ; (3) 
Improvements of land ; (4) the acquired and useful abilities of 
the members of the Society. 

This enumeration is very imperfect, because it omits that 
stupendous mass of Incorporeal Property which has so enor- 
mously increased in recent times. 

Thus if a man invests money in the Funds, or in Shares in 
a Commercial Company, or in purchasing the Goodwill of a 
business, or the Practice of a profession, or if a pubhsher buys 
the Copyright of a work, all these are Fixed Capital to him. 

Smith also enumerates four species of Floating Capital : 
(i) the Money by means of which the other three are circulated 
and distributed to their proper consumers ; (2) the stock of 
provisions in the hands of various dealers ; (3) the materials in 
the hands of different workpeople to be made up ; (4) the same 
materials when made up into finished products and ready for 
sale. 

Under the term Money Smith includes Bank Notes, Bills 
of Exchange, &c., which are Credit, and therefore he includes 
Credit under the term Capital. 

Now, it is to be observed that houses and lands are by no 
means invariably Fixed Capital. It is quite common for specu- 
lators to buy up land or to build houses for the express purpose 
of selling them again. In the hands of these speculators the 
lands and houses are Floating Capital. There are many manu- 
factories of machinery ; the machines are made there for the 
purpose of being sold : in the hands of such persons these 
machines are Floating Capital ; in the hands of the persons 
who retain these machines in their own possession, and use 
them in their business, they are Fixed Capital. 

To a person who buys the Funds or Shares in a Commercial 
Company as an investment to produce him an income, they 
are Fixed Capital. But there is a class of traders who buy and 
sell these kinds of property like the goods in a shop. To these 
persons they are Floating Capital. 

£ 



50 Economics for Beginners. 

On Payment and Satisfaction. 

30. The word Payment in law and commerce means any- 
thing whatever which is taken in exchange for something else. 

It comes from the Italian pagare^ from the Latin pacare, to 
appease, and it means anything whatever which appeases the 
claim or demand of any other person. Because when any 
person ha^ delivered or done anything for another, unless it is 
meant to be a donation, he has a claim for an equivalent : but 
at the same time he has the right to consider anything he 
pleases as an equivalent. 

Thus, when two persons exchange material products, each is 
Payment for the other : because each satisfies the claim of the 
other for an equivalent. It is sometimes supposed that when 
money is given in exchange for goods, it is only the money 
which is the payment. But this is a great error. The money 
is the payment for the goods ; but the goods are equally pay- 
ment for the money. So when money is paid in wages, the 
money is the payment for the work, and the work is the pay- 
ment for the money. 

So when a merchant takes a bill at three months in exchange 
for goods, the bill is payment for the goods ; it appeases the 
claim of the merchant : he has got what he voluntarily agreed 
to take in exchange for the goods. When the bill becomes due 
the debtor has to pay the bill, or appease the claim which the 
owner of the bill has for the money. 

But it by no means follows that Payment is the final closing 
of the transaction. The only legal word which denotes the 
final closing of the transaction is Satisfaction : if a bill is taken 
in exchange for goods, it is Payment; but it is not Satisfaction 
until the bill itself is paid. 

And Economists go further : they say that Money itself is 
only a higher order of bill, and that though giving money is pay- 
ment, it is not Satisfaction until the money is exchanged away 
for something that is desired. Thus, though a shoemaker may 
be paid when he has got money for his shoes, yet he has not 



Meaning of ' Pei'sona ' and ' Res' 5 1 

got a Satisfaction until he has got bread, or meat, or wine, or 
anything else which he desires. 



On the Meaning of Persona and Res in Rojnan Law. 

31. It will be very useful to explain the meaning of the 
words Persona and Res in Roman Law. 

Persona means any single person or any society of persons 
who can enjoy and exercise Rights. Thus in a partnership each 
member is a persona : but also the partnership is a persona, 
quite distinct from its individual members. The consequence 
is that each member of the society can have dealings with, 
and buy and sell with, the society, just as with any other indi- 
vidual. 

Every joint stock company is a persona, and when the 
individual members pay their money as capital to the company, 
the property in it is gone from them and vests in the company ; 
and what they receive in return for it is a Right to participate 
in the future profits of the company in the proportion in which 
they have contributed capital. 

An important example of this nature is the State. The State 
is z. persona quite independent of its individual citizens. Private 
individuals can lend money to the State, and receive in return 
the Right to receive a series of payments. These Rights are 
called the Funds. 

And this is the meaning of the parson of a parish. He is 
t\iQ persona who enjoys the right to certain compensation or 
reward for his services ; and this right to these ecclesiastical dues 
is called a Benefice. 

And as a persona is any body, single or corporate, which can 
enjoy a right, so Res is anything whatever which can be the 
subject of a Right. Thus not only material things are termed 
Res, but also human actions or services. If I hire a man to do 
some service for me, I have the right to demand that labour or 
service from him, and therefore it is a Res. 

E 2 



5 2 Economics for Begmners. 

So also if I have the right to demand a sum of money from 
some person in consequence of having lent him money or sold 
him goods on credit, that Right is termed a Res ; and so is every 
other right to future payment or profit. 

It is the exchange of these different kinds of Rights which 
constitute Commerce in its widest extent, or the Science of 
Economics, which is the subject-matter of this work. 



53 



CHAPTER II. 

ON VALUE. 

1. Economic Quantities are, as we have seen, of three dis- 
tinct orders, and these can be exchanged in six different ways. 
The six distinct kinds of exchange constitute the science of 
commerce in its widest extent, or the science of Economics. 
We have now to investigate the Laws which govern the relations 
of these Exchangeable Quantities, or the Theory of Value. 

The complete Theory of Value comprises — 

1. The Definition of Value. 

2. The Origin, Source, or Cause of Value. 

3. The General Law of Value : or the General Equation of 
Economics. 

The Definition of Value. 

2. Value in its original sense is a quality, or desire, of the 
mind : it means esteem or estimation : as we speak of a highly 
valued friend. But such Value is not an Economical phenome- 
non. To bring Value into Economics it must be manifested 
in some tangible form : as when a person manifests his desire, 
estimation, or Value for something by giving something in ex- 
change for it to acquire possession of it. 

But as one person cannot gain possession of what belongs 
to another person without giving him something in exchange 
for it which he desires, esteems, or Values, it is clear that for 
an exchange to take place requires the concurrence of two minds. 
If a person brought a cargo of wine to a nation of teetotallers, 



5 4 Economics for Beginners. 

there would be no desire, or Demand, for such a product : no 
one would buy it ; and such a cargo would have no Value 
among such a people. So a cargo of tobacco would have no 
Value among a nation of non-smokers ; or a cargo of beef 
among a nation of vegetarians. However much a person may- 
wish to sell his product, if no one will buy it, it has no Value. 
For an exchange to take place, so that there may be a pheno- 
menon of Value, there must be the reciprocal desire or Demand 
of two persons, each for the product of the other. 

When, however, two persons agree to exchange their respec- 
tive products, each product may be considered as the Measure 
of the Desire of its possessor to obtain the product of the other. 
And when the two persons have agreed upon the Quantities of 
their respective products which are to be exchanged, the two 
products are said to be of equal Value : and each product is 
said to be of the Value of the other. 

Thus let A and B be any two Economic Quantities which 
are exchanged at any time : then we may say — 

A valet B, 
or A is of the Value of B, 

or A = B. 

Then B is the Value of A in terms of B : and A is the Value 
of B in terms of A. 

Hence it is clear that Value is a Ratio, or an Equation. 
Like distance, or an equation, it necessarily requires two 
objects. The Value of a thing is always something external 
to itself. It is impossible to say that any Quantity has Value 
without implying that it can be exchanged for something. 
Everything it can be exchanged for is its Value in that com- 
modity. Hence any Economic Quantity has as many Values 
as things it can be exchanged for : and if it can be exchanged 
for nothing it has no Value. 

3. Hence a single object cannot have Value. We cannot 
speak of absolute or intrinsic distance or equality. If it is said 



071 Value. 55 

that an object is distant or equal, we must ask, Distant from 
what ? or equal to what ? So if it is said that an object has 
Value, we must ask, Value in what ? We can no more say that 
a Quantity is worth, than we can say that London is distant, or 
that five pounds is equal. 

But any Economic Quantity may have Value in terms ot 
any of the others. 

The Value of the money in the pockets of the public is the 
various products and services it can command. The Value of 
the goods in the merchants' and traders' warehouses is the 
money in the pockets of the public. The Value of a workman's 
labour is the wages he can earn. 

The Value of an Incorporeal Right or Property is the thing 
which may be demanded. The Value of a 5/. note is five 
sovereigns. The Value of a Postage Stamp is the carriage of a 
letter. The Value of a Promise or Pledge to cut a man's hair 
is the cutting of his hair. The Value of a Railway Ticket is 
the journey. The Value of an Order to see the play is seeing 
the play. 

These several Rights, then, have Value, and they may be 
bought and sold like any material chattels : hence they are 
called 'goods and chattels,' ' vendible commodities.' 

4. Price being the Value of anything in Money or Credit, if 
Money or Credit be excessively abundant the Prices of all 
things will rise : but they will still preserve the same Values 
among themselves. If a loaf of bread and a pound of meat 
each cost sixpence : and if, in consequence of the excessive 
abundance of Money or Credit, they each rise to a shilling, the 
pound of meat is still of the Value of a loaf of bread. Hence 
there may be a general rise or a general fall of prices. 

But there can be no such thing as a general rise or fall of 
Values. Everything can no more rise or fall with respect to 
everything else than, as Mill says, a dozen runners can each 
outrun all the rest : or a hundred trees can all overtop one 
another : to suppose that all things could rise relatively to each 



56 Eco7iomics for Beginners. 

other would be to realise Pat's idea of society, where every man 
is as good as his neighbour and a great deal better too. 



On the Error of the Expressio7i intrinsic Value. 

5. We must now say a few words about an expression which 
has been the source of immense confusion in Economics, and 
has especially obscured the Theory of Credit. 

The Value of a thing is something else for which it can be 
exchanged : it is therefore always something external to itself. 
Nevertheless it is very common to speak of Intrinsic Value. 
Now intrinsic means internal^ something inside the quantity. 
The least reflection will show that to define the Value of a thing 
to be something external to it, and then to speak of Intri?isic 
Value, are self-contradictory and inconsistent ideas. 

The confusion arose in this way : — In modern times, when 
men began to think of things of Value, they began to call the 
Quality which made them desirable their Value. So long ago as 
1696 an able writer — Barbon — pointed out the error of speaking 
of Intrinsic Value ; and that the virtue or utility of a thing is 
totally different from its Value or Price : this is confounding an 
Intrinsic Quality with an External Relation. Some Economists 
term the utility of a thing its Value in use, and its Price its 
Value in exchange. But in Economics we have nothing to do 
with Value in use, but only with Value in exchange. 

Smith, however, is one of the principal authors of this con- 
fusion. In chap. V. b. i. he begins by defining the Value of a 
thing to be the thing for which it can be exchanged : and then 
he suddenly changes his idea of Value to be the Quantity of 
Labour expended in obtaining the thing itself. Hence the 
Intrinsic Value of a thing came to be considered as the Quan- 
tity of Labour embodied as it were in it. And from this it came 
to be asserted that Labour is the cause of all Value : and Value 
was called Intrinsic. 

Thus it is very often said that Money has Intrinsic Value ; 



Diminution ill Vahie and Depreciation, 57 

and that a Bank Note or Bill of Exchange is only the represeji- 
tative of Value. 

It is easily seen, however, that these ideas are erroneous. 
Money no doubt is the produce of Labour, but Smith himself 
says that if it were not exchangeable it would have no Value. 
How, then, can its Value be Intrinsic ? How can anything 
have Intrinsic Value unless it has the things it will exchange 
for inside itself? Can anyone perceive any lands, or houses, 
or corn, or books, inside a sovereign ? If they cannot, the ex- 
pression Intrinsic Value is manifestly absurd. Money and a 
Bank Note have Value for exactly the same reason ; because 
they are exchangeable. A Bank Note has Value because it can 
be exchanged for Money and other things : Money has Value 
because it can be exchanged for other things. When a Bank 
Note and Money can be exchanged they have Value ; when 
they cannot be exchanged they have no Value. 

The expression Intrinsic Value is so common that persons 
are apt to overlook its incongruity of idea : but if we use words 
of similar import, whose meaning has not been so corrupted, 
the absurdity is apparent at once. Who ever heard of Intrinsic 
Distance, or Intrinsic Equality ? But these expressions are not 
more absurd than Intrinsic Value. Who ever heard of the In- 
trinsic Distance of St. Paul's, or the Intrinsic Equality of five? 
These considerations show how necessary it is to avoid such 
misleading expressions as Intrinsic Value. 

On Diminution in Value and Depreciation. 

6. These two expressions are often used indiscriminately, 
but they are essentially distinct. An alteration in the Value of 
a commodity means that the quantity of some other commodity 
with which it is compared has undergone a change. Deprecia- 
tion means that it is not of the Value it professes to be. Alter- 
ation in Value is used in reference to some other commodity, 
Depreciation in reference to itself. If at any time gold was 
fifteen times as valuable as silver, and if, in consequence of the 



5 8 Economics for Beginners. 

greatly increased quantity of silver, gold became twenty times 
as valuable as silver, silver would be said to have fallen in value 
with respect to gold. But if the coinage does not contain so 
much bulhon as it professes to do, it is Depreciated : or if a 
Bank Note which professes to be of the value of 5/. will only 
purchase 4/. lo-f., it is Depreciated. 

It is very necessary to observe these distinctions in all dis- 
cussions regarding the Value of coins which retain the same 
name during a long series of ages. In the time of William I. 
the pound really meant a pound weight of silver bullion. Since 
then silver has greatly increased in quantity, and other things 
are used as money as well as silver. In consequence of this 
silver has greatly diminished in Value : but in addition to that 
the pound at the present day is only about one-third of the 
pound weight of silver ; so that the Coinage is greatly Depre- 
ciated. In consequence of these combined causes it i? often 
said that the modern shilling is only of the 50th part of its value 
in the time of William the Conqueror, 

On the Orig^in, Source, or Cause of Value. 

7. We have now to determine what is the Cause or Source 
of Value. There are a great variety of things of different 
natures which have Value. We must search for some single 
cause which is common to them all : which being present, 
Value is present : which when it increases. Value increases : 
which when it decreases, Value decreases : and which being 
absent, Value is absent. 

Now, as we have defined the Value of a thing to be any 
other thing for which it is exchanged, it is evident that there 
must always be two parties to Economic Value. As exchanges 
are voluntary, each of the two parties must have some product, 
and each must desire or Demand the product of the other. 
Hence Reciprocal Demand is the Cause of Value. 

It is quite clear that Demand is the true Source or Cause of 
Value. Value is not a Quality of an object, but an affection of 



The General Equation of Economics. 59 

the mind. The sole Source or Cause of Value is Human 
Desire. When there is a Demand for things they have Value : 
when the Demand increases (the Supply being supposed the 
same) the Value increases : when the Demand decreases, the 
Value decreases : and when the Demand altogether ceases, the 
Value is altogether gone. 

The whole body of ancient writers made Demand the sole 
Cause of Value. In modern times Boisguillebert, one of the 
earliest writers on Economics, says, ' Consonmtation {Demand) 
is the principle of all Wealth.' Hume says, ' Our passions 
(desires or De?7ta?td) are the only causes of Labour.' The 
Italian Economists also are unanimous upon this point. Geno- 
vesi says, ' Value is the child of Demand.' 

The first school of Economists made all Value arise from 
Demand : and they showed that things which remain without 
Demand {Co7isoi7i7nation) are without Value. 

8. This is so obvious that it might seem superfluous to dwell 
upon it ; but, unfortunately, it is often asserted that Labour is 
the sole Cause of all Value. Anyone who reflects upon this 
assertion must see its utter fallacy. In the first place there are 
multitudes of things which have Value upon which no Labour 
was ever bestowed : in the next place, however much Labour 
has been bestowed upon a thing, if no one will buy it — that is, if 
there is no Demand for it-^it has no Value. 

The doctrine that Labour is the sole cause of all Value, and 
that all Wealth is produced from the earth, has had the most 
prejudicial effect on the science of Economics : whereas when 
we adopt Exchangeability as the sole essence and principle of 
Value and Wealth, the whole subject becomes clear and simple. 

O71 the General Xiaw of Value : or the General Equation of 
Economics. 

9. We have now to determine the General law of Value : 
or the General Equation of Economics — that is, to discover a 



6o Economics for Beginners. 

single General Law which governs the exchangeable relations 
of all Economic Quantities, whatever their nature may be, at all 
times, and under all circumstances. 

Let A and B be any two Economic Quantities, of any form 
whatever ; then suppose that A remains constant while B 
varies ; then B, or the value of A, will vary ivovsx/otir causes. 

It will Increase — 

1. From a Diminution in Quantity. 

2. From an Increase of Dejnand. 
It will Decrease — 

1. From an Increase of Quantity. 

2. Fro7n a Diminution of Demand. 

Now, as the variations in Value of the other Quantity are 
influenced by exactly the s2im.Q four causes, it is quite clear that 
the variations of both Quantities will be governed by Eig^ht in- 
dependent causes : and if these be connected in the form of an 
Algebraical Equation, that will manifestly be the true General 
Equation of Economics. 

This is the full expression of what is usually called the Law 
of Supply and Demand. It means that no change can take 
place in the Exchangeable relations of any two Economic 
Quantities, unless there is some change in the Intensity of 
Demand or the Limitation of Supply of one or both of the two 
Quantities. 



6i 



CHAPTER III. 

ON THE COINAGE. 

On the Meaning of Bullion and Coins. 

1. All civilised nations use Gold and Silver for the purpose 
of Money : but these metals in a pure state are too soft to stand 
the wear and tear of daily use. Some other metal, termed 
Alloy, is mixed with them to harden them ; and by a chemical 
law the mixed metal is harder than either of the others in a 
pure state. 

Gold and Silver in the mass are termed Bullion : but as 
the laws of all countries which use gold and silver as money 
define the quantity of alloy which is to be mixed with the pure 
metal, we shall use the word Bullion to mean gold and silver in 
the mass mixed with the legal quantity of alloy, so as to be fit 
to be made into money. 

By the present law of England, standard Gold Bullion is 
composed of 22 carats of pure gold and 2 carats of alloy : 
standard Silver Bullion is composed of 1 1 oz. 2 dwts. of pure 
silver and 18 dwts. of alloy. 

2. Bullion is further divided into pieces of a certain weight, 
defined by law : and a certain stamp is placed upon them as a 
public certificate that they are of the weight and fineness 
prescribed by law. They are further called by a certain name, 
and are then intended to be used for the purposes of commerce 



62 Economics fur Beginners. 

without further examination. Such pieces of BulHon are called 
Coins. 

This stamp or certificate in no way affects the Value of the 
Coin or the quantity of things it will exchange for. Its only 
object is to save the trouble of weighing and assaying the metal 
in commercial transactions. Nor can the Name of a Coin 
affect its Value : Values are estimated in the number of these 
Coins ; but it is necessarily implied in the bargain that these 
Coins contain a definite quantity of Bulhon of the legal 
fineness. 



On the Meaning of the I«Xint Price and Market Price of 

Gold and Silver. 

3. As the very purpose of coining is to certify that the 
pieces of Bullion are of a certain definite weight and fineness, 
it is evident that a fixed quantity of Bullion, as a pound weight, 
must be divided into a fixed number of Coins. 

The Number of Coins into which a giveji quantity of Bullion 
is divided by law, is called the iMCint Price of that quantity of 
Bullion. 

By the law at present in force, forty pounds' weight of 
standard gold bullion are divided into 1,869 coins, called Pounds 
or Sovereigns ; hence one pound weight of bullion is coined into 
46/. I4J". 6d. : or, as the value of gold is estimated by the ounce, 
one ounce of gold bullion is coined into 3/. 17s. lo^d., which is 
called the Mint Price of Gold. 

The legal weight of the Pound or Sovereign is 5 dwts. 
3^11 grs., containing 1136I3 grs. of fine gold. Sovereigns which 
fall below 5 dwts. 2f grs., and Half- Sovereigns which fall below 
2 dwts. 1 3| grs., cease to be legal tender. 

4. It is clear that the Mint Price of Bulhon is a fixed 
quantity ; it can by no possibility vary, unless the law orders a 
different number of Coins to be coined out of the same quantity 
of Bullion. 



The Market Price of Bullion. 63 

In the time of William the Conqueror the pound weight of 
Silver Bullion was coined into 240 pence : hence the Mint 
Price of Silver was i/. : but in the time of Elizabeth the pound 
weight of Silver was coined into 744 pence ; or the ounce of 
Silver was coined into 62 pence : hence the Mint Price of 
Silver was 3/. 2J-. per pound, or 5^. 2d. per ounce. 

To alter the Mint Price of Bullion is merely an expression 
which means an alteration in the legal weight of the Coinage. 

5. When Coins have been for some time in circulation, they 
necessarily lose some part of their weight from wear and tear. 
But people are so accustomed to attach a certain Value to the 
sight of a certain Coin that they do not inquire too curiously 
whether it is of the legal weight or not. So that Coins may 
pass for some time at their nominal value in exchange for 
commodities and services after they have lost much of their 
legal weight. As Shakespeare says — 

'Tween man and man they weigh not every stamp ; 
Though light, take pieces for the figure's sake. 

But when Coins are taken in exchange for Bullion the case 
is different : for then the Coins are always exchanged weight 
for weight with Bullion. So that if the Coins have lost their 
legal weight a greater number of them must be given for a given 
amount of Bullion than if they were of full weight. Supposing 
that the Mint Price of Gold is 3/. 17^. \o\d. per ounce, or that 
an ounce of Gold is divided into that number of Coins, then if 
they had lost a good deal of their weight from any cause, it might 
take 4/. 5J-. to be equal in weight to an ounce of Gold. 

The quantity of the Current Coin which is equal in weight 
to a given quantity of Bullion is called the Market Price of that 
amount of Bullion, and when the Coins are depreciated more 
of them must be given to purchase any amount of Bullion than 
if they were of full weight- The Market Price will then be 
apparently higher than the Mint Price : and this is called a 
Rise of the Market Price of Bullion above its Mint Price : and it 



64 Economics for Beginners. 

is quite clear that this is due to the Depreciation of the Coinage. 
Hence we have this fundamental law of the Coinage — 

When the Market Price of Bullion rises above the Mint 
Price, the Excess is the Proof a?td the Measure of the Depreciation 
of the Coinage. • 



On Cresham's Ziaw of the Coinagre. 

6. Aristophanes first noticed the fact at Athens that when 
a debased Coinage was issued along with a good Coinage, the 
good Coins all disappeared from circulation, and the debased 
ones alone remained. 

This fact, which has been invariably observed in all countries, 
was long the puzzle of financiers and statesmen. Formerly the 
Coinage in this country used to suffer very much from clipping 
and other bad practices. All efforts to amend it by issuing 
good coin from the Mint were found to be unavailing, as the 
good coin invariably disappeared, and the bad coin alone 
remained in circulation. Sir Thomas Gresham first explained 
the cause; hence we have called it Gresham's Law of the 
Coinage. 

It is a fundamental Law of the Coinage that bad 7noney 
drives out good inoney from circulation : or, as it is expressed in 
an old pamphlet — 

' When two sorts of Coins are current in the same nation, of 
like Value by denomination, but not intrinsically, that which 
has the least Value will be current, and the other as much as 
possible hoarded,' or exported. 

The reason of this is very simple. Suppose that full-weighted 
coins and depreciated coins are allowed to circulate together : 
one of two effects must inevitably follow. Either those persons 
who have commodities to sell will make a difference in their 
nominal price, according as they are paid in good or in light 
coin : that is, the light coin will be at a discount as compared 
with the good coin ; or if there be a law to prevent this, and to 
force both to pass at the same nominal value, everyone will 



What is a Pound f 65 

endeavour to discharge his debt at the least possible expense. 
He will always try to pay his debts in the light coin. As the 
full-weighted coins are forced down below their real value in 
this country, bullion-dealers immediately collect all they can 
and melt them down, or export them to foreign countries, where 
they will pass at their real value. Thus the good coins quickly 
disappear from circulation. 



What is a Pound t 

7. We must now explain how a certain weight ot Gold 
Bullion came in the present day to be called a Pound. 

The original measure of value in England, France, and Italy 
was formerly the pound weight of Silver Bullion. No coin 
of this weight was ever struck, bat the pound weight of Silver 
Bullion was coined into 240 pieces, called Pence. Twelve of 
these pence were called a Shilling, or solidus : and therefore 
twenty shilhngs, or solidi, made a Pound. 

Now let lb. denote a pound weight of Silver in the form of 
Bullion, and let /. denote the same weight of BulHon in the form 
of Coin ; then we have — 

240 pence = 20 shillings = i/. = i lb. 

Now if the pound weight of Silver were cut into more than 
240 pieces, that greater number of pieces would still be equal to 
the pound weight. And if we always denote 240 pieces or pence 
by the same symbol, /., whatever their weight may be, we 
should have the i lb. of Silver equal to iL phis the number of 
pieces above 240. 

This is what the Sovereigns of all these countries have done. 
Being unable to increase the quantity of Silver, they adopted 
the fraudulent plan of cutting the pound weight of silver into 
more than 240 pieces. In 1300 Edward I. cut the pound weight 
of silver into 243 pence : subsequent Sovereigns followed this 
evil example, until at last in the time of Elizabeth the pound 

F 



66 Economics for Beginners. 

weight ot silver was coined into 744 pence. Then we have 
manifestly — 

744 pence = 62 shillings = 3/. is. =■. i lb. 

As there are 12 ounces in the pound weight of Silver, each 
ounce was coined into 62 pence ; and hence the Mint Price 
of Silver was said to be 5^'. 2d. per ounce. 

8. In course of time Gold was coined into money con- 
currently with Silver. In the reign of Charles II. the African 
company brought home a large quantity of gold from the 
Guinea coast. He coined this gold into pieces which he called 
Guineas, and which were intended to be of the value of 20 
shillings, so as to represent the /. But the Mint rating of the 
coins did not agree with the relative values of gold and silver 
in the market of the world. In 17 17 Sir Isaac Newton, the 
Master of the Mint, reported to Parliament that the true value 
of the guinea was 20s. Sd. in silver. Nevertheless the guineas 
were declared to be current at 21s. : and then in the language 
of the Mint the price of gold was fixed at 3/. 17^. lo^d. per 
ounce. 

9. Gold and Silver coin were then declared to be legal 
tender for debts of any amount. But as gold was overrated by 
4d. in the /., and silver was underrated by the same rate, 
merchants in the course of the last century universally adopted 
the custom of paying their debts in gold in preference to silver, 
as being the cheaper medium; and, in accordance with 
Gresham's Law, the silver coins were exported as being 
depressed below their true value in this country. Gold thus 
gradually became the measure of value in England : and for 
exactly the opposite reason silver came to be the measure ot 
value in France. 

In 1816 this custom was adopted as law: and gold was 
declared to be the only legal measure of value to an unhmited 
amount : and the Sovereign was struck to represent the value 
of 20 shillings in silver or the /. 



Silver and B^'onze Coinage. 6^ 

10. The coinage of gold is free to the pubhc ; but the coinage 
of silver and bronze is retained in the hands of the Government. 
In order to obviate the effect of Gresham's Law, the value of 
silver is artificially raised. Since 1816 the pound weight of 
silver has been coined into 66 shilhngs ; but four of these are 
retained for the expenses of coinage: and the 62 lighter shillings 
are declared to be of the same value as the previous heavier 
ones. Thus 20 of them are declared to be equal in value to 
the Sovereign, and thus their value is artificially raised about 
6 per cent. But to prevent injustice being done, they are not 
legal tender for any sum above 4oj'., it having been intended to 
make the double sovereign the monetary unit. 

The Bronze coins are only worth about one-fourth of their 
nominal value : pence and half-pence are only legal tender for 
the value of one shilling, and farthings to the value of sixpence. 



P2 



68 Economics for Beginners. 



CHAPTER IV. 

THE THEORY OF CREDIT. 

1. The Theory of Credit was brought to practical perfection 
by a long series of illustrious lawyers, whose doctrines were 
declared to be law by the Legislation of Justinian in the begin- 
ning of the sixth century. The modern system of Credit and 
Banking is simply the practical exemplification of these prin- 
ciples. 

But for the complete elucidation of the Theory of Credit 
something more is required. For considerably more than a 
century mathematicians have been in the habit of calling Debts 
* Negative ' Quantities. But, from a want of knowledge of 
Mercantile Law, and the facts of commerce, they have not suc- 
ceeded in giving the right interpretation to the term ' Negative ' 
as applied to Debts, 

We sliall show the true meaning of the term ^ Negative ' as 
applied to Debts : and when we combine these three things to- 
gether — an exposition of the Facts of Commerce — an exposi- 
tion of the Law of Credit — and show the application of the 
Theory of Algebraical Signs to these facts, we shall find a most 
beautiful exemplification of the use of these signs, strictly con- 
formable to their use in Natural Philosophy. The principles of 
Algebra and Law and the practice of Mercantile men are in 
perfect harmony : and we shall in this chapter explain this 
branch of Economic Theory, so as to bring it to the level of 
Mercantile practice. 



On the Nature of Credit. 69 



Oil the Nature of Credit. 

2. All modern Economists admit that human Abilities, 
Energy, Skill, and Character are Wealth, because men can 
make a Profit by their use. They are called Moral or Personal 
Capital. These Moral Qualities and Character may be used 
to purchase Merchandise with a Promise to pay at a future 
time instead of with actual money, and when they are so they 
are in popular language termed Credit. 

Thus Demosthenes says, ' There being two kinds of Pro- 
perty — Money and General Credit — our greatest Property is 
Credit.' 

And also, ' If you were ignorant of this, that Credit is the 
greatest Capital of all towards the acquisition of wealth, you 
would be utterly ignorant' 

So Melon says, '■ To the calculation of Values in Money 
there must be added the current Credit of the merchant, and 
his possible Credit.' 

So also Dutot, ^A well-managed Credit amounts to tenfold 
the funds of a merchant : and he gains as much by this Credit 
as if he had ten times as much Money.' 

' Credit is, therefore, the greatest "Wealth to every man who 
carries on commerce.' 

When a merchant makes a purchase with his Credit instead 
of with Money, the Property in the goods passes to the buyer as 
absolutely and as fully as if he had paid for them with Money. 
But at the very instant that the Property in the goods passes 
to the buyer there is a Contract, or Nexum, or Obligation, 
created between the buyer and the seller, which consists of two 
parts — 

1. The Right to demand payment, in the person of the 
seller. 

2. The Duty to pay, in the person of the buyer. 

These two Quantities constitute the Contract, or the Obliga- 
tion, which is the Bond of Law between these two persons. 



70 Economics for Beginners. 

In this Contract or Obligation it is the Creditor's Right to 
demand payment which in Law, Commerce, and Economics is 
termed the Credit : and this Right is Property, which the 
Creditor can sell to anyone else, like any material chattel : 
and it may be bought and sold any number of times before it is 
paid off: and therefore it is said in Roman Law, 'Under the 
term "Wealth . . . Rig-bts are included.' 

Thus Credit is the Name of a kind of Incorporeal Property : 
it is the Right to demand a future payment : a Credit in bank is 
a Right of action against the banker for a sum of money : Paper 
Credit means Rights of action recorded on paper, such as Bank 
Notes, Bills of Exchange, &c. 

On the Application of the Positive and SJegrative Si^^ns to 
Economics. 

3. We have just said that Mathematicians have not given 
the correct explanation of the term ' Negative ' as applied to 
Debts. In so elementary a work we have not space to explain 
their error fully ; we must simply give the correct meaning. 

In the beginning of works on Algebra it is usually said that 
the signs + and — mean addition and subtraction : that quanti- 
ties before which the sign + is placed are to be added, and those 
before which the sign — is placed are to be subtracted. 

This is true in some cases, but in others it is entirely errone- 
ous. In one particular case the signs + and - do mean addi- 
tion and subtraction, but that is only one example of a very wide 
and general rule. 

All sciences deal with Quantities and Operations. 

But though these Quantities are similar in their nature, they 
may be endowed with Opposite Qualities, and when they are 
it is universally the custom in Natural Philosophy to distinguish 
them by the signs + and — . 

Thus Up and Down : to the Right and to the Left : Before 
and Behind : Before and After : the Past and the Future : Above 
and Below : Yes and No : Supporters and Opponents : Rights 
and Duties : Active and Passive, are opposite to each other. 



Theory of Signs i7i Economics, y I 

Thus, for example, if a line drawn to the Right be called 
Positive, one drawn to the Left is Negative : if one drawn Up 
is Positive, one drawn Down is Negative : in these and innumer- 
able other cases the signs + and — solely distinguish the oppo- 
site Quantities, and they have nothing to do with adding and 
subtracting. They merely denote some Opposition, Contrariety, 
or Inverseness in the Quantities to which they are affixed. 

But also opposite Operations may be performed on these 
opposite Quantities which are already distinguished by opposite 
signs. And these Opposite or Inverse Operations are also 
denoted by the same signs + and — . 

Thus to add and to subtract : to receive and to pay : to go 
forwards and backwards ; and, in short, any operations whatever 
of an opposite nature, are denoted by these signs. Consequently 
if we denote to Create by + , then to Cancel or Annihilate 
may be denoted by — . 

And the combination of these signs of opposite Operations 
with the signs of opposite Qualities affecting the Quantities, 
gives rise to the well-known Algebraical rules — 

+ X + gives + 
+ X - „ - 

- X - „ + 

- X + „ - 

These laws, which are universally applicable in Natural 
Philosophy, are equally applicable to Economics, and are alone 
capable of giving the solution of the Theory of Credit. 

There are Economic Quantities of Inverse or Opposite 
Properties : and therefore they may be distinguished by Oppo- 
site Signs : and also Opposite Operations may be performed on 
these Opposite Quantities, bringing into play the well-known 
Algebraical rules. 

As a familiar example of the signs of Distinction we may 
cite a Thermometer in which some fixed point is taken as o, 
and degrees above that point are marked + , and degrees below 
it are marked — . 



72 Economics for Beginners. 

If the mercury passes from any number of degrees on either 
side of o to any number of degrees on the other side of o, it is 
quite clear that to find the total number of degrees passed over 
tiie degrees on both sides must be added together. 

In this and all similar cases the Negative Quantities must 
be added to the Positive Quantities, and not subtracted from 
them. 

This idea of opposition is applied to motion in a continuous 
line : and Time in Natural Philosophy is considered as motion 
in a continuous line. If any point be taken in Time, and 
denoted by o, then Time on opposite sides of o will be denoted 
by opposite signs. Thus if vi^e call Time befoi^e this era + , or 
Positive, then Time after this era will be -, or Negative, and 
the successive intervals will be denoted thus : — 

... +5, +4, +3, +2, +1, o, -1,-2,-3,-4,-5, ... 

If the birth of Christ be taken as the given era, or o, the 
years before Christ will be Positive, and those after Christ will 
be Negative. To find the number of years from the foundation 
of Rome tc the present time W2 must add -753 to -1878, or 
2631 years in all. 

4. As an illustration of the application of the Positive and 
Negative Signs to Time, we will give an example which will be 
very useful in Economics. Suppose this question were asked : 
A father's age is 40 and his son^s 1 5 ; when was the father twice 
as old as his son ? 

Let X be the number of years before the present time when 
the father was twice the age of his son, 

then 4o-;f = 2 (15-^), 

or x= - 10. 

What does this Negative answer mean ? 

It means that the father never was twice the age of his son 
in time past^ which we have taken as Positive in the question. 
The epoch or event of his being twice the age of his son is to 



The terms Positive and Negative used by Jurists. 73 

be found in Time opposite to the past — that is, in Time future. 
He was not twice the age of his son 10 years ago, but he witt be 
so 10 years hence : as is very clear ; because in 10 years the 
father will be 50 and the son 25. 

Hence if any event which has happened in Time past be 
Positive, the same event if it is to happen in Time future will 
be Negative. 

Thus if a product or profit which has been produced or 
realised in Time past be Positive, the same product or profit if 
it is to be produced or realised in Time future is Negative. 
And consequently the Right to profits already realised is Posi- 
tive, and the Right to profits to be realised in the future is 
Negative. 

The terms Positive and Negative also used by Jiirists to 
denote Opposition. 

5. The terms Positive and Negative are very commonly 
used by Jurists to denote opposition as well as by mathe- 
maticians. 

Thus Ortolan uses the terms Positive and Negative Rights 
to denote Rights to acts 'and Rights X.o forbearajices. 

Jurists class Servitudes as Positive and Negative : or those 
which consist in the right of using the given subject in a given 
manner, and those which consist in the right to 2i forbeai-ance 
on the part of the owner from using the subject in a given 
manner. 

Austin speaks of Positive and Negative wrongs, or wrongs of 
commission and amission. 

In its Relation to Right a Duty is Negative : but Duties 
themselves are termed Positive and Negative : as there is the 
Duty to do something, and the Duty to abstain from doing 
something. Hence we may say in this case that we have a 
Negative sign within a Negative sign, as we shall presently find 
will be the case in Economics. 



74 Economics for Beginners. 

6. Hence, arguing from these analogies in Mathematics and 
Law, we may in Economics apply the terms Positive and Nega- 
tive to any Quantities whatever of opposite qualities ; and to 
any Operations whatever of an opposite nature. 

Thus if the Right to dema7id loo/. be denoted by + loo?., 
then the Duty to pay lool. will be denoted by — loo/., without 
any reference to any specific loo/. in cash. 



T/ie Theory of the Value o/Laftd. 

7. The Theory of the Value of Land will clearly explain the 
nature of Credit. 

Suppose we purchase an estate in land for 100,000/., where 
is the Value of our money ? Does it consist in things which 
have a present existence ? The veriest tyro would answer, 
Certainly not. Where, then, is the equivalent of the purchase 
money ? 

When we purchase an estate in land, we purchase the Right 
not only to the actually existing products of the land and 
labour, such as the houses, the trees, the crops on the ground, 
but also the Right to receive the annual products of the land 
for ever. We purchase the Right to a series of products which 
will only come into existence at definite intervals of tim.e for 
ever. Thus Property in land consists of two perfectly distinct 
parts. Property in the products of the past and Property in the 
products o{ the futiire — say, 3,000/. a year for ever. 

Now as these products will only come into existence at a 
future time, they, as has just been explained, are Negative, if we 
assume the products which have already come into existence as 
Positive ; and Property in land will be denoted thus : — 

Existing products of land together with — 3,000/. — 3,000/. 
— 3,000/., &c., for ever. 

But though the yearly products of the land will only come 
into existence at a future time, the Right to receive them when 
they do come into existence is Present, and may be bought and 
sold Uke any material chattel, as a horse or a book. Hence 



Theory of the Value of Land. 75 

each of these future annual products has a Present Value ; 

and the purchase money of the land is simply the sum of the 
Present Values of this series of future products for ever. 

Though this series of future products is infinite, a simple 
Algebraical formula shows that it has a finite limit : and that 
limit depends chiefly upon the current average rate of interest. 
When the usual rate of interest is 3 per cent., the total Property 
in land is worth about thirty-three times its annual value : con- 
sequently in such a case one part only of the Value of land is 
Corporeal ; the remaining thirty-two parts are Incorporeal. If 
the usual rate of interest were 2 per cent, the land would be 
worth fifty years' purchase. In the time of Charles IL the 
usual rate of interest was 10 per cent, and the land was worth 
only 10 years' purchase. 

Now when a person has bought an estate in land, it may be 
said without any very great metaphor that the land owes him 
a series of annual payments for ever : as he only bought this 
Right in the belief that the land would redeem it by instalments 
year by year. 

Hence the Right to receive the future products of the land 
may be called the Credit of the land. 

It is also to be observed from this example that every sum 
of money is not only equivalent to the quantity of some actually 
existing commodity, but also is equal to the sum of an infinite 
series. This Right to receive a series of payments is termed 
an Annuity. Thus every sum of money whatever is equivalent 
to a perpetual Annuity. 

A merchant in trade exercising a profitable business is an 
Economic Quantity in many respects analogous to land. He 
may have accumulated Money, the fruits of his past industry ; 
but besides his accumulated money he possesses his skill, energy, 
character, his Personal Capital, his capacity to earn profits in 
future, as he has already done in the past, exactly as the land 
has not only produced profits in the past but has also the 
capacity to produce profits in future. Thus the Value of a man 
as an Economic Quantity, Hke the Value of land, consists in the 



76 Economics for Beginners. 

Property in the realised products of the past, together with the 
Property in the products of his future industry, which of course 
are Inverse or Opposite to each other. And, as in the previous 
case, if we choose to denote the Property in the realised profits 
of the past as Positive, the Property in the expected Profits of 
the future will be Negative. 

And there are two ways in which a merchant may trade. 
He may buy goods with Money the fruits of his past industry ; 
or he may buy goods by giving in exchange for them the Right 
to demand money which is to be earned by his future industry. 
Personal Capital, or Character, used in this way as Purchasing 
Power, is, as we have seen, in popular language termed Credit ; 
and as Wealth is anything which has Purchasing Power, it evi- 
dently follows that Money and Credit are equally Wealth. 

But we have already seen that Capital is any Wealth, or 
Economic Quantity, used for the purpose of Profit ; hence 
Money and Credit may be equally used as Capital. 



If money is Positive Capital, Credit is Iirei:ative Capital. 

8. If a merchant buys goods with his Money and sells them 
with a profit, he first replaces the Money he expended, and the 
surplus is his Profit. 

If he buys goods with his Credit, and sells them as before 
with a profit, he first discharges the Debt he incurred, and the 
surplus is his Profit. 

In either case his Profit consists in the excess of his Property 
at the end of the operation above v/hat it was at the beginning. 

If he trades with Money he makes Capital of the realised 
Profits of the past : if he trades with Credit he makes Capital 
of the expected Profits of the future. In each case he makes 
a profit : hence by the definition both Money and Credit are 
Capital : but as they are inverse and opposite to each other if 
Money is Positive Capital, Credit is Negative Capital. 



Ambiguities in the Theory of Credit. yy 



On the Three Ambiguities in the Theory of Credit. 

9. We must now notice three Ambiguities in the Theory of 
Credit which have been the cause of much error, and against 
which it is necessary to warn the student. 



First Ambiguity — A Debt is not Money owed by the Debtor, 
but the Personal Duty to pay Money. 

It is very frequently supposed that a Debt is Money owed 
by the Debtor : or Money in the Debtor's possession to which 
the Creditor has a claim or Right. 

This, however, is a great error, and has misled many persons : 
several eminent Mathematicians have fallen into this error : for 
when they call a Debt a ' Negative' Quantity, they mean that it 
is Money in the Debtor's possession, to which the Creditor has 
a Right, and therefore to be subtracted from the Debtor's 
property. 

Thus suppose that a person hiA a balance of 500/. at his 
banker's, but owed 50/. ; they would write it thus : 500/. — 50/., 
and they would say that his property was 450/. 

It is easy to show that this is an erroneous view. Suppose 
a person had a balance of 500/. at his banker's, and had accepted 
a bill for 50/. payable three months after date. Then his Pro- 
perty would be stated thus : 500/. — 50/. But no one would say 
that in this case his balance at his banker's was only 450/. ; be- 
cause he is perfectly free to spend the whole of his balance of 
500/., and all that he is bound to do is to have 50/. on a certain 
day to discharge his Debt. 

A Debt is never Money owed by the Debtor ; it is the Per- 
sonal Duty to pay Money. 

This error is carefully pointed out in Roman Law — ' The 
essence of an Obligation does not consist in this, that it makes 
any specific goods our Property : but that it binds some Person 
to give us something.' 



78 Economics for Beginners. 

There is no particular money in the Debtor's possession 
which belongs to the Creditor: which he can seize upon : none 
is pledged to him : it continues the absolute property of the 
Debtor, which he has the legal right to spend or part with until 
of his own free will he transfers the Property in it to the Creditor. 
But the Debt, or Duty to pay, exists exactly the same, whether 
the Debtor has any Money to pay it with or not. 

All Jurists have carefully pointed out that the Creditor's 
Right is not a Jus in r^, or a Right to any specific sum, but 
merely a Jtis in perso7iam, or a Right against the person. 

Second A77ibigiiity — The word Jieht means both the Creditor's 
Rlg^bt of action as well as the Debtor's 3>uty to pay. 

The word Debt strictly means the Debtor's Duty to pay ; 
but it has also long been used to mean the Creditor's Right 
of action as well. 

It was already used in this sense in the twelfth century. In 
1 194 Richard I. issued a Commission for a judicial visitation on 
financial matters, in which it is said, ' Let all the Debts {Debita, 
Rights ©faction) of the Jews be scheduled, their lands, houses, 
rents, and possessions. . . . 

^ Also let every Jew swear that he will make a true return of 
all his Debts {Debita, Rights of action), pledges, rents, and all 
his property and possessions.' 

And this is the meaning which the word Debt has long 
acquired in English Law. It means a Rig:lit of action, a 
Claim, a Demand. Thus the Act 46 Geo. III., c. 125, s. 3, 
enacts that ' one Debt or Demand ' may be set off against 
another. Mr. WiUiams says, ' Within the class of choses-in- 
actiofi was comprised a Right of growing importance — namely, 
that of suing for money due — which Rig^bt is all that is called a 
Debt.' ' A Debt was anciently considered as a mere Sig-bt to 
bring an action against the Debtor.' 

In any daily paper it may be seen that the executors ot 
deceased persons advertise for any persons who have • Debts, 



Double Meaning of ' Debt! 79 

Claims, or Demands against the estates of deceased persons to 
give in a statement of them. 

An administrator is appointed by the Court of the ' goods, 
chattels, and Credits' of the deceased. 

Thus it is seen that the words Credit and Debt are used 
synonymously in law. 

It is exactly the same in common usuage : a person makes 
his will, bequeathing his Bebts — that is, his Rights of action. 

Sometimes the word Debt is used in both senses in the 
same Act of Parliament. Thus in the Supreme Court of Judi- 
cature Act it is said in sect. 25, § i, 'whose estate may prove 
to be insufficient for the payment in full of his Debts and 
liabilities/ where the word Debt means the Debtor's Duty to 
pay. 

But in § 6 of the same section it is said, 'an absolute 
assignment .... of any Debt or other legal chose -in- action 
.... to receive or claim such Debt or chose-in-action/ where 
the word Debt means the Creditor's Right to iemand. 

Accordingly in the Digest of the Law of Bills of Exchange, 
Bank Notes, &c., which we prepared for the Law Digest Com- 
missioners we began with this definition : — 

* Credit, or Debt, in Legal a7id Commercial [and Econorni- 
cal] language means a Rig-bt of Action agaifist a Person for a 
sum of money. ^ 

Hence the student must carefully observe that the word 
Debt is used in English quite indiscriminately to mean both 
the Creditor's Right of action and the Debtor's Duty to pay ; and 
it requires constant vigilance to perceive in which sense it is 
used. 

The explanation of this seeming confusion is that the word 
Debitum means that which is due : and if a person has the 
Right to demand a sum of money from another person, it is 
equally due that the Creditor should receive as that the Debtor 
should pay. Hence they are equally Debts. In French the 
Creditor's Right is called the Active Debt, and the Debtor's 
Duty is called the Passive Debt. 



8o Economics for Beginners. 



Third Ambiguity — Double Meaning of the words *l^end' aitd 
' :Loan ; ' or the Distinction between niutuum and Com- 
mo datum. 

There is still one more ambiguity to be cleared up which has 
been the cause of great confusion in the Theory of Credit in 
recent times. 

All the older writers, who were chiefly men having a prac- 
tical knowledge of business, seeing that Credit causes exactly 
the same circulation of commodities as Money, said that Credit 
is Capital, without giving any very nice definition either of 
Credit or Capital. 

Since the time of the French Economist Say, however, this 
doctrine has been the subject of much ridicule. He says in one 
passage, which has been repeated by a multitude of writers, that 
those who say that Credit is Capital maintain that the same 
thing can be in two places at once. They conceive that Credit 
is the material thing lent, or the transfer of it ; and then they 
ask, How can the same thing be m two places at once, and be 
used by two persons at the same time ? 

The whole misconception is founded on an ambiguity in the 
meaning of the words Ziend and Zioan, which are used to 
denote two operations ot an essentially distinct nature. 

There are two distinct kinds of Right — the Right of Posses- 
sion only and the Right of Property. 

And there are two distinct kinds of Loan — the one in which 
the Right of possession only for a certain time is given : 
the other in which the absolute Property in the thing ' lent ' is 
transferred to the ' borrower,' and the ' lender ' only acquires 
the Right to demand back an equivalent amount to the 
quantity ' lent.' 

Sometimes a thing is ^lent' which cannot be used without 
its destruction or consumption, or its ahenation. From the 
necessity of the case, therefore, the Property in it must be 
transferred to the borrower. Thus if bread, corn, wine, oil, &c., 
be borrowed, they cannot be used without their destruction. 



On ' Mutuum ' aiid ' Commodatum^ 8 1 

Money also cannot be used unless the borrower exchj^ngesit 
away in commerce ; consequently the borrower of Money must 
acquire the absolute Property^in it. 

In all cases of Loan, therefore, of such things as corn, bread, 
wine, oil, &c., and also of money, the borrower acquires the 
absolute Property in them : and an Obligation is created 
between the ' borrower ' and the ' lender ' by which the lender 
acquires the Rig-bt to demand back an equivalent amount of 
the things lent ; but not the identical things lent. A loan of 
this kind is called in Roman Law a Mutuum, which word they 
derived from quod de meo timmfit (because from my Property 
it becomes yours). Modern scholars, however, repudiate this 
etymology, and say that Mjiticum comes from imitare, to ex- 
change, because in this case there is always an exchange 
of Properties. In these cases the relation of Creditor and 
Debtor is created between the parties ; and the Rig:ht which 
the lender has to demand back an equivalent amount of the 
thing lent is the Credit. 

The other species of Loan is of a totally different kind. It 
a person lends his friend a book or a horse, the friend can enjoy 
the use of the book or the horse without either destroying them or 
alienating them. Consequently in such cases the borrower 
does not acquire the Right of Property in rhem, but only the 
Right of Possession for a limited period : and then he must 
restore the identical book and the identical horse lent. In this 
case the lender does not cede the Property in the thing lent to 
the borrower ; and in Roman Law this kind of ' Loan ' is called 
a Commodatum : and the relation of Creditor and Debtor is 
not created between the lender and the borrower. 

In English Law the former kind of loans are said to be 
returnable in genere^ because only similar things are given 
back : the latter are said to be returnable t?i specie, because the 
identical things are given back. 

Precisely the same relation is created on the Sale of goods 
on Credit. The Property in the goods is ceded absolutely to 
the buyer : and what the seller receives in exchange for the 

G 



82 Economics for Beginners. 

goods is the Right or Property to demand their Price in money 
at a future time : and this Rig-ht or Property is termed Credit. 

Thus the Economic Quantity called Credit or Debt is the 
Right which is created on a Loan of money, wine, bread, oil, 
and things of that nature to demand back an equal quantity to 
the things lent ; or the Right which is created on a Sale of 
goods on Credit to demand their Price in money at a future 
time. This species of Loan is in all cases a Sale, or an Ex- 
change. 

The confusion has arisen from the Enghsh and French 
languages having but one word in each to denote two opera- 
tions of an essentially distinct nature. But the distinction is 
clearly pointed out in Roman law, and the Latin language has 
a distinct word for each operation. 

On Bebts as ITeg^ative Quantities. 

lO. We have shown that mathematicians call Debts '■ Nega- 
tive ' Quantities, but are mistaken in their interpretation of the 
term Negative. After the considerations we have presented, the 
real meaning of the term is perfectly clear and simple. 

An Obhgation consists of two parts — 

1. The Creditor's Right to demand, 

2. The Debtor's Dtity to pay. 

These two Quantities are Opposite or Inverse to each other ; 
the first \% Active or Positive^ the second \'s> Passive ox Negative, 

Hence the Creditor's Right of action is the Positive Quan- 
tity, and the Debtor's Duty to pay is the Negative Quantity. 

Hence if a person has a balance of 500/. at his banker's, and 
is bound to pay 50/. at some given time ; and therefore his 
estate may be stated thus : 500/. — 50/., it is not to be read as if 
he had only 450/. at his banker's ; but it is to be read in this 
way : he possesses 500/., but coupled with the Duty to pay 50/. 
at some given time. 

Hence an Obligation consists of two Opposite or Inverse 
Quantities, the Creditor's Right to detnand ( + ) and the 



Debts as Goods and Chattels. 83 

Debtor's Duty to pay (-) : and may be denoted thus : 

j + 100/. I 

i — 100/. I 

In this case the Debt means the Duty to pay. And as these 
inverse or opposite Quantities are created together, can only 
exist together, and vanish together, they are analogous to Polar 



Forces. 



On Debts as * Goods and Chattels . 



11. We have shown that in Roman Law all Rights, and 
Credit or Debts among them, are included under the terms 
Pecum'a, Res, Bona, and Merx ; and also that in English Law 
all Property, except only freehold Property, is included under 
the term ' Goods and Chattels.' As, however, we shall have to 
exhibit the mechanism of the great commerce in Debts, it will 
be as well to familiarise the student somewhat more with the 
idea that Debts are * Goods and Cbattels.' 

Thus Sheppard says under Chattels — 

* All kinds of emblements, sown and growing grass cut ; all 
money, plate, gold, silver, jewels, utensils, household stuff, 
Debts, wood cut, wares in a shop, tools and instruments for 
work, wares, merchandise, &c. &c., are to be accounted as 
Cbattels. 

*A11 Right of action to any personal action is a Cbattel.' 

So it was resolved by Popham, Chief Justice of England, 
and many other Justices, that 'personal actions are as well 
included within this word Goods in an Act of Parliament as 
goods in possession.' 

So in another case Lord Chancellor Hardwicke said, ' And 
Debts come within the meaning of the Act, and would pass in a 
will thereby.' Burnet, J., said, 'A bond-debt is certainly a 
Chattel.' So Parker, L. C. B., said, ♦ But " goods and chattels " 
include Debts.' Lee, C. J., said, ' A chose-in-action (as an Obli- 
gation) is a Chattel.' And Lord Hardwicke said, ' Choses-in- 

G2 



84 Economics for Beginners. 

action are properly within the description of "goods and 
chattels."' 

In this case the Debt is the Creditor's Right of action. 

We have dwelt rather more upon this point than we other- 
wise should because this is the chief difficulty which lay students 
find in the subject. Everyone who has studied the most ele- 
mentary principles of law knows perfectly well that a Right of 
action or a chose-in-action is a personal chattel, like any other 
species of property : but lay readers feel a little difficulty at first 
to understand how a mere Right of action is saleable Property, 
just like so much iron or corn, gold, lead, coal, or anything 
else. 



On the Transfer of Credit or Debts, 

12. A Credit, Debt, or Right of action being Property, may 
be sold and transferred like any other material chattel. 

While it exists in the form of an invisible and intangible 
Right, of course it cannot be the subject of manual delivery : 
but it may be transferred by the consent of the parties. If John 
owes Richard a debt which Richard wishes to transfer to Wil- 
liam with John's consent, the three parties may meet, and then 
by mutual agreement Richard transfers his Right to William, to 
which John expresses his consent. John is then freed from his 
debt to Richard, and becomes William's debtor, and Richard is 
released from his debt to William. And thus the Right is trans- 
ferred from Richard to William as easily and as effectually as 
if it were a piece of money. 

But a more convenient way of effecting this result is to write 
down John's debt upon paper, with his consent that it should be 
transferred to some one else. 

This may be done in two forms. Richard may write an 
order to John to pay him or anyone he may direct the sum 
due, and John may write upon the paper that he agrees to this. 
In this form the document is called a Bill of Exchange. It is 
usually in this form : — 



Extinction of Obligations, 85 

London : May 4, 1878. 
Three months after date pay to myself or order the su7ii of 
fifty -six potmds for value received. 

Mr. John Doe. RICHARD RoE. 

If John agrees to this he writes his name across the face of 
the bill, usually with the word ' accepted,' and thus he signifies 
his agreement to pay anyone Richard may direct. 

Richard is called the Drawer of the bill, and John the 
Drawee ; and when he has accepted it, the Acceptor. 

Or it may be a Promise by the debtor to pay his Creditor 
or anyone he may name. Such an Obligation is called a Pro- 
missory Note, and is usually of this form : — 

London : May 4, 1878. 
Three months after date I promise to pay Richard Roe or 
order the sum of forty five pounds for value received. 

John Doe. 

John is then called the Maker of the note, and Richard the 
Payee. 

When the debt is recorded on paper in these forms it be- 
comes capable of manual delivery, like any material chattel : 
and whoever becomes the owner of the paper document acquires 
the Right of action. 

On the Extinction (yobligrations. 

13. Obligations are always created with the intention of 
being extinguished. Credit is always the Right to demand 
something to be paid or done : and if the promise is fulfilled the 
Credit is extinguished. And in that case the Promise has 
Value : but if the Promise cannot be fulfilled it has lost its 
Value, and is nothing more than a bit of paper. It is by the too 
extravagant creation of these Promises or Rights which cannot 
be paid off, that those terrible calamities called Monetary 
Crises are brought about : when those persons who have bought 
these Paper documents find that they cannot get paid. 



S6 Economics for Beginners. 

Commercial Credit is always a promise to pay money, and 
it is often supposed that Bills of Exchange are always paid in 
money. That, however, is a very great error. There are 
several other methods of extinguishing Credit besides payment 
in money : and under the modern system very few Mercantile 
Bills ever are paid in actual money. There are four ways in 
which Obligations can be extinguished — 

1. By Release, or Acceptilation. 

2. By Payment in Money. 

3. By Renewal or Transfer, or Novation. 

4. By Set-off, or Compensation. 

On Release, or Acceptilation. 

14. Suppose that a person is indebted 100/. and has nothing 
to pay it with ; then his Property is — 100/. 

Suppose that some one gives him 100/. : he then pays his 
debt : his Property is o : but although he has nothing he is still 
100/. richer than he was before. 

The same result happens if his Creditor releases him from 
his debt : his Property is now o : but he is now 100/. richer than 
he was before. 

This shows that the Release of a Debt is exactly the same 
thing as Gift of Money ; a principle of great importance in 
commerce. 

All Jurists have enforced this principle ; thus the ' Digest ' 
says, ' He who is freed from an Obligation has gained.' 

So Pothier says, ^A Release is a Donation.' 

So also Ortolan, ' The Release from a Debt is always classed 
as a Donation in Roman Law.' 

So Von Savigny, ' The Release of a Debt always constitutes 
a Gift equal to the amount of the Debt, even though the Debtor 
is insolvent.' 

The Release of a Debt may be considered to extinguish an 
Obligation in two ways. 

First Method. — The Creditor may agree to cancel or annihi- 



When •\- lool. cancels — loo/. ^y 

late his Right. As the Obligation was created by the consent 
of the two parties, it may be cancelled or annihilated by the 
same consent which called it into existence. 

Now if to Create an Obligation be denoted by + j _ ,' [ , 
then to Cancel or Annibilate an Obligation will be denoted 

Let us consider the effect of the Negative sign on each of 
the parties to the Obligation. The Creditor's property is 
— (+ lool'.) or — loo/. : that is, he has lost loo/. : the Debtor's 
property is -(-loo/.). But -(-100/.)= +100/. : that is, the 
Debtor has gained 100/. : exactly as explained above. 

Second Method. — The Creditor's Right of action being a 
Chattel or Goods, he may present it as a gift to anyone he 
pleases ; and he may present it to the Debtor himself as well as 
to anyone else. Then the Debtor's Property will be — 100/. 
+ 100/. 

These two Quantities cancel each other like + a and - ^ on 
the same side of an equation, and they vanish together. The 
Right is not in abeyance ; it is absolutely extinguished : and the 
+ 100/. ceases to exist as well as the — 100/., or the Debt : and 
thus the Obligation is absolutely extinguished. 



When + 100/. cancels — 100/., and wheti it does not. 

IS. It must be observed, however, that it is only in the case 
in which the person has the Right to demand from hiinself^ as 
well as the duty to pay to himself, that the Contract is extin- 
guished. Because a person's Property may be represented by 
4- 100/. — 100/., and therefore for practical purposes =0, and 
yet these two Quantities will not extinguish or cancel each 
other. 

Suppose that a person has 100/. in a banker's notes, and at 
the same time owes some one else 100/. Then his Property is 
+ 100/. - 100/., and in substance =- o ; but in this case the 



88 Economics for Beginners. 

+ 100/. and the —100/. do not cancel each other: and the 
+ 100/. is not extinguished as an Economic Quantity, for he 
may pay them away in commerce. 

Suppose a Banker A holds 100/. of another Banker ^'s 
notes : and B also holds 100/. of ^'s notes. Then the Property 
of each banker is + 100/. — 100/. : but in such a case the + 100/. 
and the —100/. do not cancel each other : and though it may 
be said that the Property of each banker, so far as these notes 
are concerned, is = o, yet there are in existence 200/. of Economic 
Quantities. 

Hence it is only when the Right and the Duty emanate 
from the same source, and when they are again revested in the 
same source from which they emanated, that they are extin- 
guished and cancelled as Economic Quantities. 

On Payment in Money. 

16. The preceding considerations will explain how a Pay- 
ment in Money extinguishes a Debt. 

Suppose that a person possesses 100/. in Money, but owes 
50/. : then his Property will be represented by 100/. - 50/. 

His Creditor's Right to demand will be represented by 
+ 50/. 

When the Creditor demands payment an exchange takes 
place. The Debtor gives the Creditor 50/. in money, and the 
Creditor transfers to the Debtor his Right of action. 

The Debtor's property is then 50/. — 50/. + 50/., or 50/. in 
money, together with the Right to demand 50/. from himself and 
the Duty to pay 50/. to himself These two Quantities cancel 
each other as before : and the Debtor's Property is now 50/. 

The transaction is therefore shown to be a Sale or an Ex- 
change. 

Thus the Obligation, or Contract, was originally created by 
the Loan or Sale of the Mutuum, and it is annihilated by the 
Sale or Exchange called Payment. Hence the Obligation was 
created by one Exchange and is annihilated by another. 



On Compensation. 89 



O71 Renewal or Transfer, or ITovation. 

17. The term Novation in Roman Law means substituting 
a new Obligation for the former one. But this may take place 
in two ways — 

1. When the Debtor himself gives a new Obligation, which 
the Creditor accepts in lieu of the old one, which is thereby 
cancelled. This is called by us Renewal. 

2. When the Debtor transfers to his Creditor an Obhgation, 
Debt, or Credit due to him from some one else. If the Creditor 
agrees to receive this, he thereby discharges his own Debtor, 
and agrees to take the Debtor's Debtor as his new Debtor; 
and then his Debtor is discharged, unless he retains his Right 
against him as a surety. 

An instance of this is where a Debtor pays his Creditor in 
a banker's notes. If the Creditor agrees to receive them, his 
Debtor is discharged, and the banker is now the Debtor to the 
new Creditor. 

Or suppose that a Debtor and his Creditor are both customers 
of the same bank. The Debtor gives his Creditor a cheque on 
his account. The banker transfers the Credit from one account 
to another ; and he now becomes Debtor to the Transferee. 

Thus the ' Digest ' says, ' Payment includes not only Pay- 
ment in Money, but also the Transfer of a Credit.' 

On Set-off, or Compensation. 

18. If two persons are mutually indebted, each may claim 
that the Debt he has against the other shall be taken in payment 
of the Debt he has to pay. The Debt of each is weighed and 
Set off against the other, and the exchange is called Cotnpensa- 
tion. If one Debt is greater than the other, a payment in 
Money of the balance only is necessary. 

The following are examples of Compensation : — 

I. Suppose two bankers issue notes, and each gets possession 



90 Ecoiwmics for Begiimers. 

of an equal quantity of the other's notes. Then each has a 
Right of action — loo/., say — against the other on his Notes, and 
at the same time the Duty to pay — loo/. on his own Notes. 
While the Notes of each are in the hands of the other there 
are of course 200/. of Rights of action, or Credit, or Debts, or 
Economic Quantities, in existence. But when they meet to 
adjust the payment, each transfers to the other the Right of 
action he has against him, in satisfaction of the Debt due from 
himself. By this exchange each has the Right of action against 
himself and the Duty to pay himself. Thus, as we have already 
seen, both Contracts or Obligations are extinguished : and the 
200/. cease to exist as Economic Quantities. 

2. Suppose a banker holds a merchant's acceptance for 
100/. ; and the merchant holds 100/. of the banker's no'.es. 
When the banker demands payment of the merchant's accept- 
ance, the merchant gives him his own notes : and consequently 
both Obligations are extinguished. 

3. Suppose that two merchants issue their acceptances for 
equal amounts, payable on the same day ; and that each 
merchant holds the acceptance of the other. On the day of 
payment each tenders to the other his own acceptance in pay- 
ment of the debt due from himself. And thus both Obligations 
are extinguished. We shall in the next chapter give a very 
striking instance of this mode of settling mercantile Obligations. 

Two Branches of the System of Credit. 

19. The System of Credit is divided into two great branches, 
Commercial Credit and Banking Credit. In the first merchants 
buy commodities by means of credit payable at a certain time 
after date. The second is where Bankers buy these Commercial 
Debts or Credits, by creating Credits of their own payable on 
demand. Banking credit is usually created payable on demand, 
and must be capable of being paid if demanded. But it is not 
intended to be extinguished : on the contrary, it is created with 
the hope and expectation that it will not be extinguished, but 



Two Branches of Credit. 9 1 

that it will continue in existence and do duty as money. There 
is no necessity that it ever should be extinguished. It may be 
transferred from one account to another in the same bank, and 
from one bank to another to the end of time. It is perfectly 
possible that much of the banking Credit which exists at the 
present day may have been originally created by the very first 
banks founded in this country, and there is no necessary reason 
why it should not continue till the end of time. Money is a 
very expensive machine to purchase and keep up : but Banking 
Credits cost nothing to create, and they may endure for ever. 



92 Economics for Beginners, 



CHAPTER V. 

ON COMMERCIAL CREDIT. 

1. Goods or commodities in the ordinary course of business 
pass through the following hands : — (i) the foreign importer : (2) 
the wholesale dealer : (3) the retail dealer : (4) the customer. 
To the first three of these persons these goods are Capitals 
because they import, manufacture, or buy them for the purpose 
of selling them again with a profit : the fourth buys them for 
the sake of use or enjoyment. The price the ultimate consumer 
pays for them nmst evidently be sufficient to repay the cost of 
all the preceding operations. 

If the foreign importer sells the goods he bought for ready 
money to the wholesale dealer, he can of course immediately 
import or produce a further supply of goods in the room of 
those he has disposed of. In a similar way the wholesale 
dealer sells to the retail dealer ; and if he were paid in ready 
money, he might immediately effect further purchases from the 
merchant to supply the place of the goods he had sold. So 
also if the retail dealer were always paid in ready money by his 
customer, he might replace the part of the stock he had sold : 
and so if everybody had always ready money at command, the 
stream of Circulation, or Production, might go on uninterruptedly 
as fast as Consumption or Demand would allow. 

This, however, is not the case. Few or no persons have 
always ready money at command for what they require. Very 
few traders can commence with enough ready money to pay 
for all their purchases : and if the stream of circulation, or 



Oil Commercial Credit. 93 

production, were to stop until the consumer had paid for the 
goods in money, it would be vastly diminished. 

Suppose, however, that the merchant, having confidence in 
the character of the wholesale dealer, agrees to sell the goods 
to him, but not to demand the money for them till some time 
afterwards. He accordingly parts with the Property in the 
goods to the wholesale dealer exactly as if he had been paid in 
money, and receives in return the Right to demand payment at 
some time after date. Now the very same circulation of goods 
has taken place as would have been caused by money. The 
only difference is that the actual payment is postponed, and 
for this the merchant charges a certain price. This Debt may 
be recorded in two ways : it may be simply recorded in the 
trader's books, and then it is called a Book Debt ; or else it 
may be embodied in a Bill of Exchange. But it is quite clear 
that the Property is exactly the same, whether it is in the form 
of a Bill or merely a Book Debt, though one form may have 
more conveniences than the other. 

In a similar way the wholesale dealer may sell for Credit to 
the retail dealer, and this Debt may also be recorded in two 
forms like the first. As in the former case, the same Circula- 
tion, or Production, has been caused by Credit as by Money. 
Lastly, the retail dealer may sell to his customer on Credit, and 
this Debt may also be recorded in the same two forms. In 
this case, as in the former ones. Credit has exactly the same 
effect as Money in circulating goods. Hence we see that Credit 
has had the same effect in all respects as Money in circulating 
the goods from the merchant to the consumer. We also see 
that the passage of the goods through these various hands has 
generated a Debt at each transfer ; and all these Debts may be 
in existence at the same time. 

2. The Debt for which the merchant sold the goods to the 
wholesale dealer is valuable property. It may be exchanged 
for anything else ; and the merchant can go into the market 
with this Debt in his hand, and buy fresh goods. When he 



94 Economics for Beginners, 

does so, the seller of the goods who takes the bill usually 
requires him to write his name on the back of it, and from that 
it is called an Indorsement. The meaning of this is that if 
the real debtor does not pay the bill when it is due the indorser 
promises to do so, if he is told of the debtor's default immedi- 
ately it occurs. If the indorsee fails to do this, the indorser is 
discharged. The bill may then pass through any number of 
hands, and effect any number of exchanges, until it is paid, 
exactly like money. About sixty years ago almost the entire 
Circulating Medium of Lancashire consisted of Bills of Ex- 
change, which sometimes had as many as 150 indorsements 
on them before they became due. 



3. On the continent of Europe the merchants devised an 
extremely convenient plan. At many of the great commercial 
cities — Lyons, Antwerp, Brussels, and many others — there were 
regular fairs at stated intervals. The merchants, instead of 
making their bills payable at their own houses, where they 
must have kept cash to meet their bills, made them payable 
only at these fairs. On a certain day of the fair the merchants 
met and adjusted their mutual claims : and if their accounts 
were equal, they were of course balanced and paid by being 
exchanged against each other, by the principle of Compensation. 
By this means an enormous commerce was carried on without 
any specie. 

4. In this country traders find it more convenient to sell 
their Bills for Money ; and there are two classes of traders 
whose business it is to buy these commercial debts : these are 
Bill Discounters and Bankers. The difference between them 
is that Bill Discounters buy these debts with itioney; but 
Bankers always buy them with their own Credit ; as will be 
fully explained in the next chapter. 

Thus we see that Credit produces exactly the same circula- 
tion of commodities that Money does. 



Credit used to Form New Products 95 



Ori Credit employed to Form New Products. 

5. The bills we have just described were created to transfer 
commodities which previously existed. Such Credit is, there- 
fore, manifestly limited by operations which have been made, 
and by the number of commercial exchanges. The number of 
bills created cannot exceed the number of transfers of the 
commodities : but they may be greatly less, because the same 
Bill may effect many transfers of property. 

But since Credit is, as we have seen, exchangeable property, 
and a substitute for Money, it maybe used equally with Money 
to bring new products into existence. 

Suppose that the Corporation of a town wants to build a 
market, but has not the ready cash to do so. It may be a 
matter of certainty that if the market were built the stalls in it 
would be taken up immediately, and the rents received for them 
would liquidate the debt. In such a case the Corporation may 
issue small bonds payable at a future date : and if these were 
made small enough they might be used in the payment of 
workmen's wages, and circulate exactly like money until the 
time limited for them to be paid off. In this case, as in all 
cases of Credit, the Credit is merely the Present Value of the 
future profit : and so long as the Credit does not exceed this it 
is sound. 

Thus in the Production of commodities which, by the unani- 
mous consent of all Economists, includes both their formation 
and their transfer. Credit performs exactly the same functions 
as Money. So far, therefore, as Production goes. Credit is in 
all respects equivalent to Money : Money being the accumula- 
tion of past profits, and Credit the anticipation of future profits. 

This must suffice here for the general outline of Credit ; to 
go deeper into the subject would be too abstruse for an elemen- 
tary work like the present. 



g6 Economics for Beginners, 



CHAPTER Vr. 

THE THEORY OF BANKING. 

1. The word Bank originated in this way : — In the year 
1 171 the City of Venice was at war both with the Eastern and 
Western Empires, and its finances were in a state of great 
disorder. The Great Council ordered a forced loan of i per 
cent, to be made from all its citizens, and promised them 5 per 
cent, interest. Such a loan is called xiXonte in Italian. At this 
period the Germans were masters of a great part of Italy : and 
the German word Banck was used as well as its Italian equiva- 
lent Monte, and was Italianised into Banco, and the loans or 
public debts were called indifferently Monti or Bancbi. Com- 
missioners were appointed to manage this public debt, to pay 
the interest upon it, and transfer the stock. 

The State of Venice took the money, which it appropriated 
to its own purposes, and gave its citizens in exchange for it 
Credit, or Stock Certificates, which they might transfer to 
anyone else. This was the essential feature of ' Banking,' and 
those traders are called ' Bankers ' who buy money from their 
customers, and in exchange for it give them a Credit, which 
they can transfer to anyone else. 

2. We must now explain the mechanism of Banking, and 
show how it augments the Capital of the country. 

Suppose that the customers of a ^banker' pay in 10,000/. 
to their accounts. Then the money so paid in is a niutuum : 
it becomes the banker's absolute Property, and in exchange for 



Mechanism of Banking. 97 

it the banker creates an equal amount of Credit in his cus- 
tomers' favour. ■ That is, the ' banker ' buys this money by 
ci eating an equal amount of Rights of action against himself ; 
and his accounts would stand thus : — 

Liabilities. I Assets. 

Deposits . 10,000/. I Cash . . 10,000/. 

These Rights of action, which the banker so created as the 
Price of the Money, are in the language of banking termed 
' Deposits : ' the money itself is termed an Asset. 

The customers can either demand Money in exchange for 
these Rights of action ; or they can transfer them to anyone 
else. 

But although the customers may demand payment of their 
Rights at any time they please, they would not pay in money to 
their banker's if they meant to draw it all out again immediately. 
Nevertheless some will want to draw out part of their funds ; 
but if some want to draw out money, others will probably pay 
in money ; so that in ordinary and quiet times a banker's cash 
will seldom differ by miore than one thirty-sixth part from day 
to day. Hence if a banker keeps onQ-ienth part of his cash to 
meet any demands for payment that may be made, that is ample 
and sufficient in all ordinary times. 

3. A banker of course makes no profit by his customers 
paying in money : on the contrary, he often loses, because he 
often agrees to pay interest for it, and consequently he must 
trade with it in order to make profits. 

A * banker' trades in this way: — He sees that 1,000/. is 
sufficient to bear liabilities of 10,000/. : consequently he argues 
that cash to the amount of 10,000/. will bear liabihties to several 
times its amount. 

The most eligible mode of trading is to buy or discount 
Commercial Debts in the form of Bills of Exchange. 

A 'banker,' seeing that one-tenth in cash is sufficient to 
s-upport his liabihties, buys perhaps 40,000/. of Commercial 



98 Economics for Beginners. 

Bills : and he buys these Bills exactly in the same way as he 
bought the money : he buys them by creating Credit or Rights 
of action against himself. A ' banker ' invariably buys or dis- 
counts a Commercial Bill by writing down the amount of it to 
the credit of his customer, and at the same time he charges him 
the discount. The Credit he creates against himself, or places 
to the account of his customer, in buying a bill, is also called a 
Deposit, equally as the Credit created in exchange for cash. 
Supposing the Rate of discount was 4 per cent., and the bills at 
three months, then the discount on this sum would be 400/. 
Consequently, in exchange for the bills to the amount of 40,000/. 
he would create Credit against himself to the amount of 39,600/. 
Hence just after purchasing these bills his accounts would 
stand thus : — 



Liabilities. 



Deposits . . 49,600/. 



49,600/. 



Assets. 

Cash . . . 10,000/. 
Bills of Exchange 40,000 
50,000/. 



By this process the banker has added 39,600/. of Credit to 
the previously existing Cash. 

From the foregoing exposition of the business of ' banking ' 
it is seen that this is the definition of a ' banker : ' — 

A Banker is a trader who buys Money and Debts by creating 
ether Debts. 

Thus the essential and distinctive feature of a ' Bank' and a 
' Banker ' is to issue Credit payable on demand : and this 
Credit may be put into circulation and serve all the purposes of 
Money : and by so much Credit as the banker can maintain in 
circulation over and above the quantity of cash he retains he 
practically augments the Capital of the country. 

Few persons probably have any idea of the stupendous 
superstructure of Credit created by the business of banking. 
An eminent authority has calculated that in the United King- 
dom there are about 800,000,000/. of Bank Credits : and these 
perform the function of so much gold. 



Mechanism of Banking. 99 

Nor probably are many persons aware of the immense con- 
sequences produced by banking ; one of its consequences is 
that it has tripled the value of land : before the introduction of 
banking the usual rate of interest was 10 per cent., but the 
bankers, being able to create so much credit, which had exactly 
the same effects as money, were able to reduce the rate of 
interest, until it may be considered to be at an average about 
3 per cent., and thus the value of all the land in the kingdom 
has been tripled. 

4. The banker having created these Credits, or Rights of 
action, or Deposits, his customers might utilise them in two 
ways — 

1. The banker, if his customers wished it, gave them his 
Promissory Note for such a sum as they pleased. 

2. The customer might write an order to the banker directing 
him to pay such a sum as he had credit for, to anyone else or 
to bearer. 

These paper documents neither created nor extinguished a 
liability ; they merely recorded it on paper for the convenience 
of transferring it to some one else. 

London bankers continued to issue their own promissory 
notes till about the end of the last century : but about 1793 
they discontinued this practice : and since then their customers 
can only circulate these Bank Credits by means of cheques. 
But bankers were never prohibited from issuing notes till the 
Bank Charter Act of 1844. 

5. Cheques being the only means the customers of a London 
banker have of operating on their accounts, we have now to 
show the different effects which may follow. 

1. The actual money may be drawn out : if so, the banker's 
liability is extinguished : this is a resale of money to the cus- 
tomer : and the banker buys up the Right of action against 
himself. 

2. The Credit may be transferred to the account of another 

H 2 



100 Economics for Beginners. 

customer in the same bank : and consequently the payment is 
made without the use of any cash. 

3. It may be paid into another bank : but as all banks do 
business in the same way, if the bank A has claims against the 
bank B, it is probable that B will have about an equal amount 
of claims against A. If the claims of the two banks are equal, 
the Cheques or orders are exchanged, and the Credits readjusted 
to the accounts of the different customers, without any payment 
in money. If it should happen that the claims of all banks 
against each other exactly balanced, any amount of business 
might be carried on without requiring a single coin. If they 
did not balance, it used to be the custom to pay only the 
difference in coin : but by an ingenious arrangement the neces- 
sity for coin is now dispensed with in all cases. 

Banking is thus a species of insurance : a banker might be 
called upon to pay all his liabihties at once, just as all the 
houses insured in an office might be burnt down : or all the 
lives insured in an office might drop at once. But all insurance 
and banking is based upon the expectation that these events 
will not occur. A banker multiplies his liabilities upon a given 
basis of specie, and keeps by him a sufficient amount of cash to 
insure the immediate payment of all claims which are likely to 
be demanded of him : if an unusual demand comes upon him, 
he must dispose of some of the securities he has bought. 

071 Cash Credits. 

6. We will now give an example of the use of Credit which 
will display its powers in a very striking light, and to which ihe 
greatest part of the prosperity of Scotland is due. 

Bankers use their credit in the operations just described to 
buy commercial bills which arise out of the transfer of com- 
modities, and it has been shown that they create Credit to 
several times the amount of cash in their possession. 

The Bank of Scotland, which was founded in 1695, began to 
issue i/. notes about 1704. In 1727 the Royal Bank was 



On Cash Credits. loi 

founded. In the very contracted sphere of Scotch commerce 
at that time there were not sufficient commercial bills in circu- 
lation to exhaust the Credit of the Banks, and the Royal Bank 
devised a new method of getting its Credit into circulation. 

It agreed upon receiving sufficient guarantees to open Credits 
in favour of trustworthy persons : all advances being made 
exclusively in its own notes. 

A Cash Credit is, therefore, simply a drawing account, 
created in favour of a customer, upon which he may operate in 
precisely the same manner as upon a common drawing account : 
paying interest in the debit instead of receiving interest on the 
Credit. It is thus an inverse drawing account. 

These Credits are extremely useful to all persons in business, 
or in commencing a profession which requires a certain amount 
of Capital. 

Every person in business must necessarily keep a certain 
amount of ready money by him, to answer immediate demands 
for small daily expenses, wages, and other things. This, if 
invested in business, might produce a profit of 15 or 20 per cent. 
One object of a Cash Credit is to furnish the trader with the 
convenience of a small amount of cash upon paying a moderate 
interest upon it : and to allow him to invest the whole of his 
own cash in his business. 

Several professions require a certain amount of ready Capital 
to start with. In England those who enter such professions 
must have the actual capital : in Scotland it is done by means 
of a Cash Credit, guaranteed by their friends. 

These Credits are granted to all classes of society, to the 
poor as freely as to the ricii. Everything depends upon 
character. Multitudes of men who have raised themselves 
from the humblest positions in life to enormous wealth began 
with nothing but a Cash Credit. 

The operation of these Cash Credits is immensely extended 
beyond Commerce, and their advantages are more openly and 
strikingly displayed in the prodigious stimulus they have given 
to agriculture in Scotland. They have indeed been the principal 



102 Economics for Beginners. 

means of making it what it is. Scotch farmers have almost 
invariably nineteen years' leases, and, where they are given for 
the express purpose of reclaiming land, frequently much longer. 
The farmer desirous to effect improvements, on the security of 
his lease and the guarantee of his friends obtains a Cash Credit. 
With this advance — pure Credit — he reclaims the land, employs 
the people, reaps the harvest, and pays off the loan. 

All public works of every description — canals, railroads, 
roads, bridges, docks — are all created by means of these Cash 
Credits. 

In all these things we see the nature and the power of 
Credit. If they were created by means of Money, that would 
have been the accumulation of the Profits of the past. If they 
had been created by means of Money, they would have replaced 
the Money expended upon them. But there being no Money, 
the Banks plant their branches in every direction and advance 
an equal amount in their own i/. notes : and these are the 
Present Value of the future profit. When the profit is realised 
it redeems the Credit : and the result of the operation is exactly 
the same whether it is effected by Money or by Credit. And 
thus we see that Credit is Productive Capital exactly in the 
same way and in the same sense that Money is. 



I03 



CHAPTER VII. 

ON PROFITS. 

1. Profit is the difference between the Cost of Production of 
anything and its Value — i.e. the difference between the sum ex- 
pended in placing the thing in the market where it is offered 
for sale and the sum it sells for. 

This difference may be either in excess of the Cost of Pro- 
duction, in which case it is Positive, and is called a Gain : or 
it may be in defect, and then it is Negative and called a ILoss. 

The Rate of Profit is the amount of this difference made in 
some given time, as a year. 

When the Profit is made on a Loan of Money, it is called 
Interest or Discount. 

It is easily seen that the Rate of Profit varies directly as the 
Amount of Profit, and inversely as the Time in which it is 
made. 

It is of the greatest importance to observe how the Rate of 
Profit increases as the intervals are diminished in which it is 
made ; as many erroneous assertions are made which arise 
solely from not sufficiently attending to this. To exhibit this 
we will give an example. 

Suppose the Capital advanced is loo/., and the Profit is 20/. ' 

Then if the Profit be made in a year the Rate of Profit is 
evidently 20 per cent. 

If the Profit is made in a month, the Rate of Profit is 240 
per cent, per annum. 



104 Economics for Beginners. 

If the Profit is made in a week, the Rate of Profit is 1,040 
per cent, per annum. 

If the Profit is made in a day, the Rate of Profit is 7,300 per 
cent, per annum. 

Hence, supposing that the Capital advanced is the same, and 
the actual Profit is the same, the Rate of Profit is enormously 
increased by the accelerated rapidity with which Profits are 
made. 

The importance of this doctrine, and the social effects 
it produces, have scarcely yet been sufficiently appreciated by 
Economical writers. We will give an instance or two to exhibit 
this. 

A retail bookseller is by the custom of the trade entitled to 
a discount of 25 per cent, off the published price of the book. 
Many booksellers offer to supply books at a discount of 20 per 
cent, below the pubhshed price : and this seems a very moderate 
profit for them to make : but let us see what the Rate of Profit 
is. 

Suppose a purchaser orders a book from a retail bookseller 
one day, and gets it the next day at a discount of 20 per cent. 
Then the bookseller makes a profit of 5 per cent, on three- 
fourths of the price of the book in one day, which is an actual 
profit of 6-666 per cent, made in one day, or at the Rate of 
2,433 PG'' cent, per annum. 

A costermonger buys a basket of strawberries in Covent 
Garden market for i^d. in the morning, and sells it for 3^. the 
same afternoon. Everyone would say that that was a very 
moderate profit. But it is at the Rate of more than 9 per cent. 
per day, which is more than 3,300 per cent, per annum. 

2. The want of attention to this circumstance has had some 
very important effects. It has often been asserted that the 
interests of Capital and Labour are always antagonistic to each 
other : that Profits can only increase by a diminution of Wages, 
and Wages can only increase by a diminution of Profits : and 
that the gain of one must necessarily be accompanied by a loss 



071 Profits and Wages. 105 

to the other. This doctrine, which seemed to show that the 
state of society must necessarily deteriorate with the increase 
of numbers, led a caustic philosopher of the present day to 
nickname Political Economy the ' dismal ' science. 

But a few sentences will dissipate these gloomy ideas : and 
will show by the simplest arithmetical calculation that Profits 
and Wages may very well rise together. 

It is quite easy to show that Wages may be increased, 
actual Profit diminished, and yet the Rate of Profit greatly in- 
creased. 

Suppose, as before, the Capital is 100/., and the Profit 20/. 
made in a year : the Wages being a certain amount. 

Suppose that the period of making the Profit is reduced to 
a month ; then the Rate of Profit is 240 per cent, per annum. 

Suppose that, in consequence of making the greater Profit, 
the Capitalist advances Wages 5/. Then the Cost of Production 
is 105/., and the Profit is 15/. made in one month : or nearly 
14-3 per cent, per month : which is Profit at the Rate of more 
than 167 per cent, per annum. 

Suppose a still more accelerated sale, and that the trader 
makes the Profit in a week, which is a Profit at the Rate of 
1,040 per cent, per annum. 

Suppose that the trader, in consequence of this greatly in- 
creased Rate of Profit, raises Wages, so that Cost of Production 
amounts to no/. Then with an outlay of no/, he makes a 
Profit of 10/ in one week : being more than 9 per cent, per 
week ; or more than 468 per cent, per annum. 

Suppose a still more accelerated sale, and that the trader 
makes the Profit in one day : and suppose that, in consequence 
of this increased profit, the trader raises wages, so that cost of 
production amounts to 115/. ; then with an outlay of 115/. he 
makes a Profit of 5/. in one day, or at the Rate of 1,825 P^r 
cent, per annum. 

Hence while Price remains the same Wages may be con- 
siderably, and Rate of Profit be immensely, increased by the 
simple acceleration of the periods of return. 



I06 Economics for Beginners. 

There may, therefore, be a sohdarity of interest between 
Capitalist and Workman ; and not a necessary antagonism, 
according to the doctrine we have alluded to. In fact, it is en- 
tirely founded on an arithmetical mistake. The writers who 
support it have entirely failed to perceive that Time is a 
necessary element in the definition of Rate of Profit : they 
define the Rate of Profit to be merely the ratio of the Profit to 
the Capital ; and they never perceived that a Profit made in a 
day is a very different Rate of Profit than the same Profit 
made in a year : and thus whole masses of their doctrine come 
tumbling down by the simple rectification of an Arithmetical 
definition, just as if a barrel of dynamite were placed under the 
Monument. 

Thus is verified the truth of the trade axiom, Small profits 
and quick returns. 

3. Persons who engage in trade must live by their trade ; 
they must, therefore, necessarily charge their customers such 
prices as will enable them in the long run to live on the profits 
of their trade. Hence, when transactions are very trifling in 
number and very small in amount, they must charge very high 
prices in order to enable them to live. It is this circumstance 
that compels small shopkeepers in country districts to charge 
such high prices for their goods, to the great indignation of 
many well-meaning but unreflecting persons. It is not un- 
common to hear such persons exclaim against the extortionate 
charges of country shopkeepers, quite forgetting that if the 
traders cannot make a living out of their business they must- 
give it up altogether ; and the people be totally deprived of the 
convenience. 

It has sometimes happened that country gentlemen, having 
plenty of other means to back them, have established rival 
shops for the express purpose of beating down the prices of 
country shopkeepers. The consequence has been that the 
traders who had nothing but their business to support them 
have been ruined ; the gentlemen in process of time either got 



An Expression of Senior s inadequate. 107 

tired of their whim, or for other reasons abandoned it ; and the 
germ of a nascent trade in a district was destroyed : a pregnant 
example of the Spanish proverb, ' Hell is paved with good 
intentions.' 

It is also the extremely minute amount of the transactions 
of apothecaries and druggists which obliges them to charge 
such enormous profits, and not only the reward due to their 
superior skill. The druggist probably sells for a shilling what 
cost him a farthing. This apparently enormous profit is simply 
the necessary consequence of the exceedingly minute sums in 
which he deals. When a trader deals in large sums he can live 
upon a profit of 5 per cent, per day. But when the sums he 
deals in are shillings and pence, the profit must be enormous to 
enable him to hve. People do not require medicine by pounds' 
worth, but by shillings' worth and pennyworths, and hence his 
enormous profit is necessary to enable the trade to exist. 

But a multiplication of transactions and an increase of their 
amount inevitably lowers prices. Nowhere are rents so high 
as in the City of London : and nowhere are the prices of ordi- 
nary goods so moderate Goods in the City are in many cases 
25 per cent, cheaper than in the suburbs ; and this is not 
entirely the result of competition, which is equally active in one 
place as in the other ; but it is the result of the greater number 
and magnitude of the transactions. 

It is for the same reason that large Capitals always crush 
out small Capitals in a business ; because large Capitalists can 
always live on smaller profits than small ones. If a trader had 
1,000,000/. he could live very well upon a profit of 5 per cent, 
per annum, or 50,000/. a year : but if he had only a capital of 
100/. he could not exist upon 5/. a year. 

4. Senior originated an expression which is often repeated, 
but which is very inadequate. He said that Profits are the 
reward of abstinence : meaning that they are the reward of 
Capital, or things which are saved from the past, and devoted 
to reproduction instead of personal enjoyment. But, after the 



io8 Economics for Beginners. 

exposition of the system of Credit which we have given, it is 
evident that this expression is very inadequate, because ihe 
enormously greater proportion of trade is carried on by Credit, 
which is not the savings of the past, but the anticipation of the 
future. Hence Profits are not only the reward of abstinence, 
but to a very much greater amount the reward of foresight. 



Interest and Discoicnt. 

5. The Profit made by the loan of Money is called Interest 
or Discount. 

If the unit of Debt to be bought is loo/. and the Profit 5/. — 

In the case of Interest the lender pays down 100/., and in 
exchange for it receives the Right to demand 105/. at the end of 
the year. 

In the case of Discount the lender pays down 95/., and 
receives in exchange the Right to demand 100/. at iheend of the 
year. 

Of these two methods of trading in money Insurance and 
other Companies which make advances to landowners adopt 
the method of Interest ; but Bankers and dealers in money in- 
variably adopt that of Discount. 

As by Discount a Profit of 5/. is made on the actual advance 
of 95/., while by Interest a Profit of 5/. is made on the actual 
advance of 100/., it is evident that Discount is more profitable 
than Interest. 

While the Rates are moderate the difference is not great : 
but as the Rates increase the difference increases at an enor^ 
mous ratio ; as a few examples will show. 

Suppose a Money-lender discounts a Bill at 20 per cent. : 
he advances 80/., and at the end of the year he receives 100/., 
and his Profit is 25 per cent. 

If he discounts a Bill at 50 per cent., he advances 50/., and 
at the end of the year receives 100/. : therefore his Profit equals 
the advance, or is 100 per cent. 

Suppose a man lent 100/. at 100 per cent, interest, at the end 



Rate of Interest. 109 

of the year he would receive 200/. ; and his Profit would be 100 
per cent. : if he discounted a bill at 100 per cent, he would 
advance nothing, and he would receive 100/. at the end of the 
year, or his Profits would be infinite I 

6. The Rate of Interest in a country at any time depends 
upon the General Law of Supply and Demand : but there are 
several circumstances which influence it indirectly, and it is of 
great consequence to all sorts of commercial enterprise to have 
the average rate of interest as low as possible. 

The Value of all Property which produces an annual revenue 
in the nature of fixed capital depends very greatly upon the 
average Rate of Interest : such as the Funds, Land, Shares in 
Commercial Companies, and Annuities of all sorts. 

7. We cannot in this brief outline give any account of the 
long-continued prejudice against interest. Even in this com- 
mercial country it was only in 1833 that it became lawful to 
take more than 5 per cent, interest on commercial bills ; and 
only in 1854 that the Usury Laws were finally abolished. In 
France interest is still limited to 6 per cent., except in the case 
of the Bank of France, which is allowed to raise its rate above 
that in order to be able to prevent a drain of gold from the 
country. And this in the country where Turgot demonstrated 
the futility of Usury laws before Bentham. 

We may give a few examples to show the futility of usury 
laws. Boisguillebert says that the small provision dealers of 
Paris throve on money borrowed at the rate of five sous the 
crown per week, or more than 400 per cent, per annum, because 
they sold perhaps five crowns' worth of merchandise, on which 
they gained one-half, or 50 per cent. (i.e. 18,250 per cent, per 
annum) ; and if they perform this operation five or six times a 
week, it is easy to live and pay such interest to those who lent 
them the money. 

So Gerard Malynes says that the similar trade of London 
was carried on with money borrowed at the rate of \d. per 



no Economics for Beginners. 

shilling per week, which is about 433 per cent, per annum. 
Turgot cites the case of the same class of people in his day, 
who carried on their trade with money borrowed at 173 per 
cent, per annum, to show the absurdity of the usury laws. 
And a still more striking example is given by M. Gustave de 
Puynode, quoting from the speech of a member of the last 
Legislative Assembly of France. He said, ' Every morning the 
small provision dealers receive a five-franc piece to buy the 
objects, which they resell with a profit of three or four francs. 
In the evening they repay the five francs with twenty-five cen- 
times in addition. They make no complaint of interest, which 
is yet at the rate of 1,800 per cent,' Nor had they any reason 
to do so ; for by borrowing this five-franc piece they made three 
francs of profit, out of which they only paid one-quarter of a 
franc as interest. Now their profit was 21,600 per cent, per 
annum ; and if they made that profit they could well afford to 
pay 1,800 per cent., or the one-twelfth part of it, as interest. 



Ill 



CHAPTER VIII. 

ON RENT. 

1. Rent is the Right to demand compensation for the use 
of certain species of property, when the compensation is paid 
in the form of a series of payments, or an Annuity : such as 
Lands, Houses, Copyrights, Patents, Mint dies. Telegraph 
wires, &c. 

It was also formerly applied to an Annuity paid for the use 
of money, as the Funds. This use of the term has been dis- 
continued in this country : but the French Funds are called 
Rentes ; a Fundholder in French is called a Retitier. Turgot 
speaks of the Interet Terrier and the Interet Reiitier^ or the 
landed interest and the monied interest. 

The nature and effects of Rent gave rise to a well-known 
controversy am.ong Economists. It arose out of the self-con- 
tradictions of Smith on Rent ; because in one series of passages 
he says that Rent is a cause of Price — that is, that it is part of 
price — and therefore that the payment of Rent raises the price 
of corn ; and in another series of passages he says that Rent is 
the effect of Price — that is, that Rent can only be paid when the 
Price rises — and consequently that it does not affect the Price 
of corn. 

In this short outline we have not space to give the details of 
this controversy ; we can only examine the practical question 
whether the payment of Rent raises the price of corn ; and 
whether corn would be any the cheaper if Rent was withheld 
from the landlords. 



112 Economics for Beginnei's. 

To determine this we have only to consider how Rent 
arises, and what it is, and then consider the apphcation of the 
General Equation of Economics to these facts. 

1. The first thing necessary is that the land should belong 
to one person, and be let out to another : or that the relation of 
Landlord and Tenant should exist. 

2. The possibility of Rent being paid arises from this : that a 
few persons, especially with the assistance of horses, cattle, and 
agricultural implements, can raise from the earth a very much 
larger amount of produce than is necessary for their own 
subsistence. 

3. We have, then, to consider under what circumstances 
Rent will arise. 

Suppose that a tract of country belonged to the State, or to 
a private individual : suppose that this land was of varying 
degrees of fertility, and suppose further that each family had 
exactly as much land as was absolutely necessary for their own 
subsistence, and no more. Then it is clear that they could pay 
no rent : because they would have no surplus produce to pay it 
with. 

Suppose, however, that each family had a very much larger 
quantity of land than was necessary for their own subsistence. 
Then after they had provided for their own subsistence they 
could give the surplus produce to the landlord, and that surplus 
produce is the Rent. 

Now of course if the land is rich and productive, the family 
would be able to give more of the produce to the landlord ,_ 
because they could subsist on a smaller amount of land. 

If the land was very poor they would of course require a 
larger amount for their own subsistence ; and they could only 
afford to give the landlord a smaller amount than if the land 
was rich. 

But the possibility of the payment of Rent entirely depends 
upon the question whether the tenants have a surplus after pro- 
viding for their own subsistence. 



On Rent. 1 1 3 

2. We have next to consider whether the payment of Rent 
raises the price of corn. 

Suppose a farm near a town : the price of corn in the market 
is determined by the Law of Supply and Demand. If A is the 
possessor of the farm he will reap all the profits made by it. If 
he has a partner B^ the same quantity of produce is brought to 
the market ; and A and B will share the profits between them. 
A no doubt will have less profits than if he was sole owner of 
the farm. But it is quite evident that, whether A has a partner 
or not, it can in no way aftect the price of corn, because it 
neither alters the Supply nor the Demand. 

Now suppose A and B are landlord and tenant. Then the 
produce is raised and brought to market, and the tenant pays 
the landlord a stipulated share of the profits. But that neither 
alters the quantity produced nor the quantity demanded, and 
therefore it cannot affect the price of the corn. Hence the 
price of corn cannot be affected whether a single person pro- 
duces it, or whether two do so in partnership. 

The same reasoning applies to Tithes : Tithes, like Rent, are 
the Right to a share of the produce. Hence in this case three 
persons share the produce of the land instead of two. But that 
neither alters the Supply nor the Demand. Hence neither the 
payment of Rent nor Tithes can in any way affect the price of 
corn, any more than it affects the price of goods in a shop, 
whether there are one, two, or three partners in the concern. 

3. Rent can always be paid in kind when the quantity of 
the produce leaves a surplus after providing for the subsistence 
of the tenants ; and Rent can always be paid in Money when 
the Value of the produce leaves a surplus after providing for the 
subsistence of the tenants. 

In a young colony where only a small town population exists 
there is, of course, only a small demand for the produce of the 
land, which will therefore be at a low price ; consequently it is 
only the lands near the town which can he cultivated for profit ; 
because, in the first place, there is no demand for the produce, 

I 



1 1 4 Economics for Beginners. 

and secondly, the price of it is so low that it would not pay to 
bring it from a distance. But the more the town population 
increases the greater will be the demand for corn, and of course 
the price will rise, and then it will pay to enlarge the area of 
cultivation. The rent of land near the town will rise, because 
the Value of the produce will rise ; but the greater the distance 
from the town the greater the cost of production is, or the 
expense of placing it in the market : and as, of course, all the 
corn of the same quality in the same market will bear the same 
price, whatever its cost of production may be, as the cost of 
production increases, the Profit, out of which Rent is paid, 
decreases, until at last no surplus Profit is left to pay Rent. 
Consequently no Rent can be paid for corn grown at such a 
distance from the town. An American writer justly says, ' The 
cost of transport has fixed year after year the limit of agriculture. 
Translated into miles of railroad, it has been the radius that 
has described the charmed circle within which grain-growing 
would pay : for the price of grain at Liverpool fixes its price at 
any point in this country. The farmer sells his wheat at Liver- 
pool price, less the cost of transport to Liverpool. As that cost 
increases his profit decreases. When it reaches a certain point, 
his profit is «//, and he must stop producing.' And this doc- 
trine is universally true ; it is invariably the price of the great 
City markets which fixes the price of all sorts of country pro- 
duce — corn, meat, poultry, eggs, &c. — and not the reverse, as is 
so often supposed. It is not the cost of production of country 
produce which fixes the price in the London market, as is so 
often supposed; but the price in the London market which 
indicates whether the produce can be raised at such a cost as 
to leave a profit. 

Consequently the Rent which can be paid for land pro- 
gressively diminishes, until at last it ceases altogether. This 
accidental difference in the cost of production, or the cost of 
placing the produce in the market, has actually led some 
Economists to the extraordinary hallucination that the payment 
cf Rent is exclusively due to these differences of cost of pro- 



071 Rent. 1 1 5 

duction ; and that no such thing as Rent could exist, if it were 
not for these differences of cost of production. 

To exemphfy this doctrine let us take the case of the colony 
we have just supposed. As long as there is only one centre of 
consumption of course there will be differences of cost of pro- 
duction in placing the produce in the market; and then, ac- 
cording to these Economists, Rent can be paid. But suppose 
that other centres of consumption spring up from any cause, so 
that, as we may suppose, the cost of production, or the cost of 
placing the produce in the various markets, is equalised ; then, 
according to this doctrine, no Rent could be paid ! The very 
statement of such a doctrine is its refutation. 

If this doctrine were true a large extent of country of uniform 
fertility and convenient access to markets, like the plains of 
Bengal or Lombardy, could pay no Rent ! 

We need scarcely say that this is the Ricardo Theory of 
Rent, which some Economists admire so much ; and which 
Mill says is "Csx^ pons asinoriim of Political Economy, but which 
any practical man of business would laugh at. 

Ricardo applied this theory to mines as well as to land : and 
Mill, as usual copying Ricardo, says, ' Agricultural productions 
are not the only commodities which have several different costs 
of production at once, and which in cojisequence of that difference, 
and in proportion to it, afford a rent. Almost all kinds of raw 
material extracted from the interior of the earth — metals, coals, 
precious stones, &c. — are obtained from mines differing con- 
siderably in fertility — that is, yielding very different quantities 
of the product to the same quantity of labour and capital' 

Now let us observe the necessary consequence of such 
doctrines. If the rent of mines arises solely from differences 
in the fertility of mines, and is only paid in consequence of that 
difference, it manifestly follows that if all the mines were of 
equal fertihty there could be no such thing as Rent — a doctrine 
too absurd to require a moment's refutation. It would mani- 
festly be just as absurd to say that Rent is paid for houses 
because houses are of different sizes : and that if all the houses 

I 2 



1 1 6 Economics for Beginners. 

in a great city, like London and Paris, were of the same size 
there could not be any such thing as Rent : or that freights are 
paid for ships because ships are of different sizes, and that if all 
ships were of the same size there could be no such thing as 
freights : or that wages or salary are paid to men because men 
differ in capacity, and that if all men were of equal capacity 
there could be no such thing as wages or salary : and so on in 
innumerable cases : in short, if the Ricardo-Mill Theory of Rent 
be true, prices are only paid for anything because things differ 
in quality or degree. 

But this does not exhaust the absurdity of the Ricardo-Mill 
Theory of Rent : because if it were true, as they say, that Rent 
only arises from differences of fertility between different mines, 
it would follow that if there be but a single mine or quarry no 
Rent could be paid for it ! 

But, in fact. Mill himself has entirely overthrown this Theory 
of Rent. He says, ' Whatever be the causes, it is a fact that 
mines of different degrees of richness are in operation, and 
since the value of the produce must be proportional to the cost 
of production at the worst mine (fertility and situation together) 
it is more than proportional to the best. All mines superior in 
produce to the worst actually worked will yield, therefore, a rent 
equal to the excess. They may yield more, and the worst mine 
?nay itself yield a rent.' 

Now if this be true, which it undoubtedly is, what becomes 
of the doctrine that mines only pay a Rent in consequence of 
their being of different degrees of fertility : and that the Rent is 
the excess of the more fertile mines above the least fertile one ? 
If all mines pay a Rent, how can it be essential to Rent that 
they should differ in fertility ? It is evident that it is a 
mere accident that mines differ in fertility. All differences of 
fertihty in soils are the mere accident of Rent, and not its 
essence. As M. H. Passy truly observes, this is to take the 
circumstances which make a difference in the Rate of Rent for 
the cause which produces Rent. It needs no ghost to tell us 



Rent of Shops. 1 17 

that lands and mines which possess superior advantages of 
fertility and situation will pay a higher Rent than inferior ones. 
The capability of Rent being paid for a farm purely depends 
upon the question whether the Value of the produce of the 
farm leaves sufficient profits, after defraying cost of production, 
farmer's necessary profits, &c., to pay Rent : it has absolutely 
nothing whatever to do with the consideration whether other 
farms are more or less fertile than itself : and the Value of the 
produce depends upon the Intensity of Deina7id daxd. the Limi- 
tation of Supply of the produce in the market : and thus the 
whole question is brought under the dominion of the General 
Equation of Economics. 

4. Rent, then, as has been seen, does not affect the price of 
agricultural produce, because a certain Price in the market is 
necessary to attract a certain supply : and how that Price is 
divided can make no difference to the Consumer. Besides 
that, the agricultural Producers are far too numerous to com- 
bine : if they could combine and limit the supply they might 
undoubtedly force up the price of corn. This was formerly 
attempted to be done by excluding foreign corn, and so limiting 
the supply. But all these laws have now been abolished ; and 
each producer must adapt himself to the circumstances of the 
market. It is said that the owners of mines, especially coal 
mines, have on some occasions combined to limit the supply, so 
as to force up the price. 

But the case of shops differs from that of land. In these 
Rent does undoubtedly enter into price : because in such cases 
it is part of the necessary cost of production. No man created 
the land or the minerals : but shops are not the gift of nature. 
They are created by the expenditure of Capital, which is part of 
the necessary cost of production, and it must be replaced in the 
price of the articles. Moreover, each shop is a little market in 
itself : over which the producer has complete command, only 
controlled by other producers, who are all in a similar position. 
A retail dealer buys his goods at a certain price from the 



1 1 8 Economics fur Beginners, 

wholesale dealer, and he has a certain price to pay for Rent : or 
if he built the shop himself, he must have laid out a certain 
Capital on it, and must have a certain interest on that expendi- 
ture. He must also provide for his own maintenance. He 
expects to have a certain amount of custom : he therefore 
fixes such a price upon his articles as he estimates will provide 
for these things. If he cannot obtain these returns he must 
give up his business. All his competitors are exactly in the 
same position : and thus the producers have the command of 
the market. The prices which each may fix are only con- 
trolled by what he thinks his customers will give, and his 
fellow competitors will enforce as well as himself. None of 
these competitors, however, can afford to sell below that amount, 
any more than he can. Consequently, in such cases, Rent is a 
part of the necessary cost of production, as being only the 
interest on capital expended : and production must cease unless 
such interest is afforded : and therefore in such cases it neces- 
sarily and justly forms part of price. 

It is easily seen that this is true by anyone who considers 
the difference between the prices of fish, fruit, and vegetables 
as sold in shops, where the shop is fixed capital, and the same 
articles sold by costermongers in the street, whose only fixed 
capital is a barrow. 



TI9 



CHAPTER IX. 
ON LABOUR, OR IMMATERIAL WEALTH, AND WAGES. 

Definition of Xiabour. 

1. We have now to consider Labour, or Immaterial Wealth, 
the second of the three species into which Economic Quantities 
are divided. 

The author of the ' Eryxias ' showed that Labour is Wealth, for 
the same reason that gold and silver are ; because persons can 
gain things in exchange for it ; and all Economists since Smith 
treat Labour as a marketable commodity, subject to the general 
Laws of Value. 

Labour is sometimes divided into muscular and nervous, or 
Labour of the body and of the mind. In common parlance it 
is more frequently applied to the Labour of the hands or body ; 
and the term Labourers is often considered to apply only to 
such persons as ploughmen, carpenters, masons, and other 
artisans. This, however, is a grievous error. Labour in 
Economics means an exertion of the mind, however manifested, 
either by the hand, the tongue, or in any other way. However 
simple work may be, it must be directed by thought. All Labour 
is in reality Thougrbt, accompanied more or less by muscular 
exertion : and the sedentary scientific student, the lawyer, the 
clergyman, the professor, the painter, the cabinet min'ster, the 
banker, the merchant, are as truly labourers and working men as 
any carpenters, masons, or ploughmen. As Corin says truly — 
Sir, I am a true Labourer : I earn my bread. 



120 Econom ics for Begin fiers. 

All persons are Labourers who earn their bread by personal 
exertion or services, from the Lord Chancellor to the lowest 
hodman. Nothing can be more unfortunate than making dis- 
tinctions in kind where none exist in reality, and marking off 
certain portions of the community as working classes, and 
supposing that they are governed by peculiar laws, different 
from those relating to other .classes. Each of the great sciences 
— Astronomy, Geometry, Optics, Engineering, Medicine, Law — 
is as truly the product of Labour as the Pyramids, a railway, or 
an ironclad. 

Smith expressly includes * the acquired and useful abilities 
of all the inhabitants or members of the society, under the title 
of fixed Capital, and he says, ' The Property which every man 
has in his own Labour, as it is the original foundation of all 
other property, so it is the most sacred and inviolable. The 
patrimony of a poor man lies in the strength and dexterity of 
his hands.' Ricardo designates Labour as a Commodity. So 
Huskisson said, ' Labour is the poor man's Capital,' meaning 
the Commodity he has to offer for sale to make a profit by. 
Dr. Stirling says very truly, * Trade regards Labour itself simply 
as a matter of traffic and exchange ; a thing to be bought and 
sold in the market, a Commodity — one, indeed, of primary im- 
portance, compared with which all others dwindle into insigni- 
ficance ; but still a Commodity, which varies in quantity and 
fluctuates in price, and the Value of which, consequently, is 
governed by the very same laws which regulate the value of 
those Commodities which are the products of Labour,' 

Labour, therefore, being simply a Commodity, there is a 
market for it, like as there is for anything else. There is a 
Labour market, just as there is a corn market, a meat market^ 
a poultry market, a vegetable market, or a fish market. 

On TVag^es. 

2. When one person sells to another the Right to demand 
so much Labour or Service from him of any description, he 



The Wages Fund. 12 1 

becomes the servant of that person, and the remuneration he 
receives is properly termed "Wa^es in our homely old English. 
In modern times some classes of Labourers or servants disdain 
this old Saxon vi^ord, and adopt others. Wages is now usually 
confined to the sum paid for manual labour. Officers in the 
services speak of their Pay : Professional men of their Fees : 
employes of all sorts of their Salary. But all these names 
merely denote the reward for labour ; and all who receive them 
are Labourers, whatever their rank or the nature of their Labour 
may be. Wages are often distinguished as Nominal and Real : 
nominal being the number of coins or pieces of money the 
labourer receives ; and real wages being the amount of neces- 
saries and enjoyments those pieces can command. 

The VTagres Fund. 

3. Many writers seem to think that there is some definite 
Fund set apart for the maintenance of Labourers, which they 
call the Labour Fund, or the Wages Fund, which they suppose 
regulates Wages. Thus Jones, who confines Wealth to material 
objects only, says Wages depend upon the amount of Wealth 
devoted to maintaining Labourers. And almost all writers who 
have spoken of this Wages Fund have considered it to be 
the accumulated results of past labour. But such ideas are 
highly erroneous. No better example of their fallacy can be 
given than the system of Cash Credits in Scotland, as applied 
to agricultural improvements. We have shown that these were 
not effected by the accumulated results of past labour ; but by 
Credit, or the anticipation of future profits. The same prin- 
ciple of course is true everywhere else. The Wages Fund in 
every case is not the fund which an employer may have, but the 
anticipated price of the article. And how is this to be obtained 
before it is actually received.'* By means of Banking Credits. 
This is one of the functions and uses of Banks. It is to create 
Credit to form the Wages Fund, in anticipation of the prices 
paid by the consumers : and thus is seen the immense im- 



122 Economics for Beginners. 

portance of a solid banking system to the labouring classes. It 
multiplies the Wages Fund a hundredfold, and provides con- 
tinuous employment for them as long as there is a prospect of 
continuous demand for their products. 

On Rate of IVagres. 

4. Having thus shown that Money and Credit are the Fund 
out of which Wages are paid, we have next to determine what 
governs the Rate of Wages. 

It was long maintained that Wages are regulated by the 
price of food ; and this was one of the assertions on which the 
Protectionist system was based. 

Thus Smith in one place says, '■ The money price of corn 
regulates that of all other home-made commodities. 

' It regulates the Money price of Labour, which must always 
be such as to enable the labourer to purchase a quantity of corn 
sufficient to maintain him and his family. . . . 

' By regulating the money price of all other parts of the rude 
produce of land, it regulates that of the materials of almost all 
manufactures. By regulating the money price of labour, it 
regulates that of manufacturing art and industry ; and by regu- 
lating both it regulates that of the complete manufacture. The 
money price of labour, and of everything that is the produce 
either of land or labour, must necessarily either rise or fall in 
proportion to the money price of corn.' 

Thus it is seen that Smith asserts that the Rate of Wages is 
regulated by the price of corn. 

But the same Smith also says, ' The Wages of Labour do not 
in Great Britain fluctuate with the price of provisions. These 
vary everywhere from year to year, frequently from month to 
month. But in many places the money price of labour remains 
uniformly the same sometimes for half a century together. . . . 

' The variations in the price of Labour not only do not corre- 
spond either in time or place with those in the price of provi- 
sions, but they are frequently quite opposite.' 



Rate of Wages. 123 

Thus Smith's doctrines are quite contradictory. Burke saw 
the truth : ' The squires of Norfolk had dined when they gave 
it as their opinion that it (Labour) might or ought to rise or 
fall with the market of provisions. The rate of wages in truth 
has no direct relation to that price. Labour is a commodity 
like every other, and rises and falls according to demand.' 

Ricardo also says, ' The natural price of Labour is that 
price which is necessary to enable the labourers, one with 
another, to subsist and perpetuate their race, without either 
increase or diminution.' ' The natural price of Labour depends 
on the price of food, necessaries, and conveniences required for 
the support of the labourer and his family. With a rise in the 
price of food and necessaries the natural price of labour will 
rise : with a fall in their price the natural price of labour will 
fair 

Very slight reflection will show how vague and inaccurate 
the ideas in these sentences are. What are the natural food, 
necessaries, and conveniences of the labourer? The standard 
varies in every country. Are we to take the wheaten standard 
(;f England, the oaten standard of Scotland, the potato standard 
of Ireland, or the black rye standard of Poland ? Which of 
these is the natural standard 1 Wages in the West Riding of 
Yorkshire used to be \\s., in Dorsetshire 7^"., a week. Which of 
these was the natural standard ? 

It is quite manifest that it is not the price of food which 
regulates wages, but the wages received which indicate the most 
expensive food which the labourers can afford to buy. Wages 
have not risen because the labourers eat wheaten bread instead 
of rye, as formerly : but they eat wheaten bread because their 
wages enable them to do so. The wages were not so low in 
Ireland because the people lived upon potatoes, but they were 
obliged to live upon potatoes because their wages were so low : 
and their wages were so low because there were so many 
labourers and so little employment. So it is on the continent 
of Europe. The people in many Continental countries live so 
badly because their wages are so low. Nothing can show more 



124 Economics for Beginners. 

elearly the error of the idea that the price of food regulates 
wages than, on the one hand, America, Canada, Australia, and 
other new colonies, where labour is very high and food very 
cheap ; and, on the other hand, where food is much dearer and 
Labour much lower. Take the case of the unfortunate needle- 
women of London and other cities of Western Europe. Gamier 
remarks exactly the same of the needle-women of Paris. ' At 
Paris all needle-work has fallen so low that those cannot live by 
it who have no other resource.' And Dr. Mayer says that at 
Lille the workwomen who make lace gain from \d. to \\d. 
a day, working sixteen hours. And population has increased 
so much, compared to employment, that those who could gain 
two or three francs thirty years before — in 1845 — could only gain 
one franc, and those the most favoured. At the other extremity 
of the world we may take China as an example of the same 
truth. Travellers give us an account of the disgusting garbage 
which the poorer Chinese will eat : and why is this ? Simply 
because of their enormous numbers and scant employment. 

It is the Law of Supply and Demand which governs wages, 
like the value of everything else. An excessive increase of the 
number of workpeople forces down wages by an inevitable Law 
of nature ; and as their numbers increase faster than their 
employment, their wages must progressively diminish, and their 
comforts and scale of living become progressively deteriorated. 
Nothing could prevent the scale of living of the poorer classes 
of this country descending to the level of the Irish or the 
Chinese, if their numbers went on increasing without a corre- 
sponding increase of employment. 

It is no mere speculative opinion that a general and long- 
continued low price of corn is not only not necessarily accom- 
panied by a low rate of wages, but most probably by the very 
reverse. The most remarkable continuance of generally fine 
seasons and abundance of corn ever known in England, occurred 
in the last century. For the extraordinary period of sixty-five 
years — from 1701 to 1765 — there was, with few exceptions, a con- 
tinued series of plentiful harvests. The average price of corn 



Rate of Wages. 125 , 

was 16 per cent, less than the average for the same period of 
the preceding century ; but, notwithstanding that, the price of 
labour rose greatly during the same period ; and — what was least 
to be expected — agricultural labour rose 16 per cent. Tooke 
says, '■ The fact, indeed, of a rise of money wages in this country 
coincidently with a fall in the price of corn during the long 
interval in question, rests on unquestionable authorities.' And 
Smith says, ' In Great Britain the real recompense of labour, it 
has already been shown — the real quantities of the necessaries 
and conveniences of life which are given to the labourers — has 
increased considerably during the course of the present century 
(i.e. the eighteenth). The rise in its money price seems to 
have been the effect, not of any diminution in the value of silver 
in the general market of Europe, but of a rise in the real price 
of labour in the particular market of Great Britain, owing to 
the peculiarly happy circumstances of the country.' In the 
latter part of the century the price of wheat rose enormously, 
in consequence of a long succession of bad harvests, but there 
was no corresponding rise in wages. 

J. B. Say has also remarked the erroneousness of the doc- 
trine that the price of food regulates wages. ' Experience also 
contradicts an assertion of Ricardo's. He says that while the 
price of labour regulates the value of products, it is the price of 
provisions of first necessity (in Europe, for example, corn) which 
regulates the price of labour, and that a rise in the price of corn 
diminishes the rate of profit and raises wages. Well, I am 
informed by the manufacturers of England and France — espe- 
cially by MM. Ternaux and Sons, who have mills at Liege, 
Louviers, Sedan, Reims, and Paris — that it is exactly the contrary 
which happens. When corn becomes dearer, wages go down. 
This result is not accidental : the same cause is always followed 
by the same effect : and the effect lasts as long as the cause. 
The explanation is not difficult. When corn is very high, the 
labouring classes are obliged to devote to purchasing grain a 
part of their wages which they would have employed in superior 
clothing, or rent, or furniture, or more succulent and various 



126 Economics for Beginners, 

food : in a word, they reduce all their consumption : and the 
want of consumption reduces the required quantity of nearly 
all other products. Hence the reduction of demand lowers 
profits of all sorts, as well of masters as workmen.' 
These observations are true everywhere. 

071 the Division of Xiabour. 

5. Smith commences his work by giving an interesting 
account of the immense increase of production which is effected 
by a combination of persons each restricting their work to a 
single process. This principle is usually called the Division of 
Labour, to which expression objection has been taken by some 
eminent Economists, as they say it ought rather to be called 
the combination of labour. Smith says that in making a pin 
there are about eighteen distinct operations ; and that ten 
persons working together could make about 48,000 pins in a 
day — that is, each may be held to make 4,800 in a day — whereas 
if each person had to do the whole work of each pin, he could 
scarcely make twenty pins in a day. 

Smith has erred in describing the origin of this principle ; 
he says that it has arisen out of the trucking, bartering, or 
exchanging disposition of men. This, however, is a mistake : 
because in the Sociahstic and Communistic states of society, in 
which all exchanges are peremptorily forbidden, and which are 
organised for the express purpose of abolishing all exchanges, 
the principle of the division of labour is as thoroughly well 
understood and acted upon as in Economic societies, where 
private property and free exchange exist. For this principle 
conduces immensely to the increase of the Quantity of the 
produce, no matter whether this produce belongs to the com- 
munity in general or to each member separately. 

Moreover, many species of animals perfectly well understand 
and act upon the principle of the Division of Labour ; in fact, 
Aristotle originated the term in describing the operations of 
bees. Pliny and Virgil use the same term respecting them. 



The Division of Labour. 127 

and modern observation has found that they carry this principle 
much further than was suspected by these writers. Many other 
animals, such as ants and beavers, also practise this principle. 

This principle was known and acted upon in ancient times. 
Herodotus says that in Egypt every medical man was compelled 
to confine himself strictly to one branch of the profession. At 
Venice in 11 72 a law was enacted that every workman should 
confine himself to a single occupation, in order to secure su- 
perior work. The same law was enacted by Philippe le Bel in 
France. 

We may quote an example from J. B. Say equally striking, 
but probably not so familiar to English readers ; he describes 
the manufacture of playing cards : — ' It is not the same work- 
men who prepare the paper of which the cards are made, nor 
the colours printed upon them : and in giving attention to only 
one employment in this matter, we shall find that a pack of 
cards is the result of several occupations, of which each one 
occupies a distinct series of workmen or workwomen, who are 
always employed in the same operation. It is always different 
persons, but always the same set, who sift the packets and the 
swellings of the paper which injure the quality of its thickness ; 
the same set of persons paste together the three leaves of which 
each card is formed, and put them in the press : the same set 
of persons colour the backs of the cards : the same set always 
print the outlines of the figures : another set print the colours 
of the same figures : another set dry over the heater the cards 
when printed : another set polish them on both sides. It is a 
separate trade to cut them equally : it is another to collect 
them and form them into packs : another to print the covers of 
the packs : and yet another to pack them : without counting 
the duties of the persons employed in buying and selling them ; 
in paying the workmen and keeping their accounts. In short, 
those in the trade say that each card — that is, each little piece 
of cardboard of the size of the hand — before being fit to be sold, 
goes through not less than seventy different operations, which 
are each the subject of a separate trade. And if there are not 



128 Econom ics for Beginners. 

seventy kinds of workmen in each manufactory of cards, it is 
because the division of labour is not carried so far as it might 
be, and because the same workman performs two, three, or four 
distinct operations. 

* The effect of this separation of employments is immense. 
I have seen a manufactory of cards in which thirty workmen 
produced every day 15,500 cards — that is, more than 500 cards 
per man. And it may be presumed that if each workman was 
obliged to perform each operation by himself, and supposing 
him skilful in his art, he would not complete more than two 
cards a day : and consequently the thirty workmen, instead of 
making 15,500, would only make 60.' 

To give similar details of other trades would fill a volume. 
We will only give one. In watch-making there are 112 distinct 
trades, to each of which a boy may be apprenticed ; and of 
which he knows none but that one. It would be interesting to 
know how many watches these 112 men could make in com- 
bination ; and how many if each man made the whole watch ; 
and not only the number but the quality of the watches ! 

Babbage has observed that the principle of the division of 
labour not only immensely increases the quantity, but also 
greatly reduces the cost of production, because different parts 
of the work require very different degrees of skill. He shows 
that in pin-making men are employed at 5^-. 6^. a day, women at 
\s. 6d., and children at 6d. Four men, four women, and two 
children can make one pound of metal into 5,546 pins in seven 
hours and a half, at a cost of a little more than a guinea, 
whereas if all the persons employed were of the necessary skill" 
to make the most difficult part it would cost nearly four times 
as much. 

Babbage gives a striking instance of the application of this 
principle in a great scientific work. The French Revolutionary 
Government wanted a series of mathematical tables, to facilitate 
the application of the decimal system which they had adopted. 
The task was entrusted to M. Prony, who soon saw that even with 
the assistance of three or four able assistants he could scarcely 



TJie Workman's Share of Price. 129 

expect to finish it during his life. Meditating on this, he hap- 
pened by chance to take up Smith's work and hit upon the 
chapter upon the division of labour. He immediately perceived 
that he might put out his logarithms to manufacture. He 
accordingly selected five or six of the most distinguished 
mathematicians to discover the best formulae ; he then appointed 
seven or eight of an inferior degree of skill to convert these 
formulae into numbers ; and he then chose from sixty to eighty 
who required a very small degree of knowledge to complete the 
tables. And in this way the whole work, contained in seventeen 
large folio volumes, was executed. And many other public works 
of great utility might be executed by adopting this plan. 

On the Workman^ s Share of the Price. 

6. It is now perfectly well understood that the Price of the 
product is the Fund out of which wages are paid. The master^s 
Profit and the Workman's wages both come out of this Fund ; 
and the only possible contention is to ascertain how it is to be 
divided. 

But the whole of this fund is not available for division : first 
there must be deducted a sum sufficient to maintain all the 
fixed and circulating capital in full working order : then there 
must be also deducted a fair interest on the sum invested as 
fixed and circulating capital. After deducting these sums from 
the Price of the product, the remainder is the fund available for 
division between masters and workmen. 

Masters and workmen, however, often take different views 
as to the principle on which this fund should be divided. 

The Masters' view often is that Labour is simply a com- 
modity, which has its market value like any other, governed by 
the general Law of Supply and Demand : and that the workmen 
have no right to inquire into the Profits which they make by 
their skill and foresight, or which may accrue to them from a 
favourable turn of the market. 

Workmen, however, are often far from agreeing to this view 
K 



1 30 Economics for Beginners. 

of the matter. They, or at least the reasonable ones, admit 
that the Capitalist is entitled to fair profits on his capital en- 
gaged, and also to a reasonable reward for skill, management, 
superintendence, &c. After that, however, they think that the 
remainder should be divided among themselves as Wages. 

To which the masters reply, that in many cases in certain 
trades the business is often carried on at a heavy loss, and that 
if the workmen are to appropriate all the profits to themselves, 
they must also be called upon to share the losses ; which is, as 
a matter of fact, impracticable : and therefore they have no 
right to share all the profits. 

In many cases where expensive machinery is employed, as 
in cotton mills, the machinery must be kept going at any cost, 
and in a period of depression masters work at a heavy daily loss, 
simply to prevent the machinery from deteriorating, and the 
workpeople from starving, and the necessity of breaking iip their 
establishments. And if the workpeople devour all the profits in 
time of prosperity, where are the funds to come from to maintain 
them in a period of depression ? If the bees devour all the honey 
in summer, what is to feed them in winter 1 Hence it is plainly 
to the real advantage of the workpeople themselves that they 
should not devour all the profits as soon as they are made. By 
allowing them to remain in the hands of the masters, they are 
in reahty laying up an insurance fund for a rainy day. 

This portion of the price of the product is a superior limit 
which wages cannot possibly exceed. It is a cast-iron limit — 
the result of the inexorable Law of Supply and Demand, which 
imposes a superior limit on wages. 

Now we may observe that there are two kinds of Labour in 
commerce : one of which is necessary to produce the profit ; 
the other is not. 

In a merchant's office, or in a bank, the clerks, servants, 
messengers, porters, &c., contribute nothing to the success of 
the business. Such Labour as there is is subject to the simple 
rule of Supply and Demand. They have no shadow of a claim 
of demand a share of the Profits : and if the heads of the 



The Workman! s Share of Price. 1 3 1 

establishment give them a bonus on a successful year, that is 
an act of mere grace and favour. So the servants of a railway 
company — engine-drivers, guards, porters, and clerks — contribute 
nothing to the success of the enterprise. Their Labour is a 
mere commodity, which must be paid for whether the line pays 
any dividend or not. They have no more claim to Lave a 
share of the profits than another company from whom they 
might buy engines and carriages would have a claim to be paid 
for them according to the profits the company was earning. 
Such persons have no more claim to a share of the profits than 
domestic servants would have to higher wages if their master 
were successful in business. 

■ But the Labour of operatives, miners, and artisans stands 
on a different footing altogether. Their labour, their skill, is 
indispensably necessary, and conduces directly to obtain the 
product and the profit. Their labour may justly be styled 
co-operative with that of the master : they are in reality quasi- 
partners with the Capitalist in obtaining the profits, and without 
them the profits could not be made ; and the master obtains a 
distinct profit out of the labour of such workmen, which he can 
estimate in a very different sense from that of the labour of the 
other class. 

The claim of such workmen to a share of the profit which is 
distinctly due to their work, stands on a totally different footing 
from that of the other class. It is now pretty generally 
recognised that such workmen have an equitable claim to a 
certain share of the profit which is the result of the joint efforts 
of the master and workmen : though what that share should 
be, and how they are to obtain it, is a very different matter : 
moreover it is far easier to determine in some kinds of business 
than in others. 

In some trades it is a settled compact that the wages paid 
to the workmen shall depend upon the price of the article. 

It was said in the '■ Times ' of July 31, 1874, ' In view of the 
difficulties that surround the labour question at home, I think 
it desirable to call attention to one mode of setthng affairs of 

K 2 



132 Economics for Beginners. 

this sort adopted by the coal-miners at Newcastle to the north 
of Sydney. A demonstration signalising the settlement was 
held lately. The chairman of the miners' association took the 
opportunity to announce the terms of agreement accepted by 
the managers and miners, which were as follows : — ist. That the 
minimum rale of wages payable for hewing and all other work 
usually performed by miners at each of the above-named 
collieries shall be the rates current thereat prior to the 23rd day 
of July, 1872, when the selling price of sound or best coal was 
Zs. a ton, and of small coal 35-. 6^. per ton. 2nd. That, subject 
to the above limit, the wages payable at each of the above 
collieries for hewing and all other work usually performed by 
the miners shall be regulated by the price of coal, and rise and 
fall with it.'' Many other rules were laid down for adjusting 
the details of this scheme : and submitting all disputes which 
might arise to arbitration ; and then the correspondent con- 
cludes, ' On concluding the above, the chairman announced 
to coal buyers in Victoria, South Australia, New Zealand, Hong 
Kong, Batavia, and India that no hindrance in future would 
exist through strikes to the supply of ships ; the commercial 
millennium of the past had arrived : strikes and lock-outs were 
things of the past. Various miners addressed the meeting in 
the same happy and assuring strain.' 

In a great many manufacturing establishments throughout 
England the truth is recognised that those who contribute to 
the formation of the product should have some share of its 
increased price ; and various schemes have been adopted to 
effect this, with the happiest results. But in a general outhne ' 
of this nature we can do no more than allude to them : their 
separate details would fill a volume. 

On Co-operation. 

7. Another method of giving workmen a share of the Profits 
is by forming Co-operative Societies ; these, in fact, are nothing 
more than Joint Stock Companies, formed by working men, 



Trades UnioJts, Strikes, and Lock-outs. 133 

who undertake dififerent kinds of business, and of course divide 
all the profits among themselves. The experiment has succeeded 
very well in many instances when applied to shops. The sub- 
scribers merely buy the goods which they would require to get 
at retail shops ; and divide the profits among themselves. The 
principle has also been applied to mills and manufactories, 
but it is too soon to say yet whether it is likely to be equally 
successful in these cases. 



Oil Trades Unions, Strikes, and Xiock-outs. 

8. Failing, however, these methods of satisfying the claims 
of working men for what they consider their fair share ot 
profits, there is another which has been the cause of a vast 
amount of misery — viz. Strikes. 

Trades Unions were originally benefit clubs and friendly 
societies for working men, to insure working men against the 
accidents of life, want of employment, illness, &c. : and so far 
as this goes they are undoubtedly very beneficial. 

But Trades Unions often interfere between working men and 
their employers in a way which is wholly unjustifiable ; prescrib- 
ing methods of executing the work so as to encroach most 
seriously on the freedom of the masters in carrying on their 
business : for the express purpose of multiplying labour. 

Up till about half a century ago it was illegal for workmen 
to combine to raise the price of their labour. This of course 
was monstrously unjust. Working men have as much right as 
anyone else to set what price they please on the commodity 
they have got to sell ; and any number of them have a right 
to agree that they will not take less than a certain price for 
their labour. But they must carry out their resolution peaceably ; 
and they have no right whatever to prevent other workmen 
from taking such a price as they please for their work. 

It is alleged by the advocates of Trades Unions that by 
acting in concert workmen can maintain a higher level of wages 
than if they act separately. This, on the other hand, is strongly 



1 34 Economics for Beginners. 

denied by others, who say that Trades Unions have no such 
effect, and that the wages of workmen in places where there 
are no Trades Unions have risen quite as much by the natural 
operation of the Law of Supply and Demand as where there are. 
It would be wholly impossible in so general an outline as this 
to examine this question ; we can only indicate the nature of 
the debatable points. 

Though, however, workmen have a perfect right to strike to 
obtain better wages, it is beyond dispute a most dangerous 
power, and requires to be used with the greatest discretion. 
As a matter of fact the strikes which have taken place have 
produced an immense preponderance of evil and misery. There 
are few things which would be more melancholy or more prac- 
tically useful than a plain history of the various strikes which 
have taken place during the last fifty years, and their results. 

A Lock-out is the correlative on the side of the masters to a 
strike on the side of the workmen. As those workmen who are 
out on strike must be supported by their mates, it is not unusual 
for working men to endeavour to beat the masters in detail. 
They agree that the men in one master's employ shall strike, 
and be supported by the others until that master succumbs. 
They thus hope to attain their object by treating each master 
in succession in the same way. When masters apprehend that 
such tactics are going to be put into play against them, they 
defeat them by locking out the working men in a body, so as 
to cut off the supphes. Then ensue those frightful contests 
between Capital and Labour in which those who win are only 
a little better off than those who lose. These meagre remarks 
are all that we can give in this place : the fact is that the 
subject is too vast, serious, and complicated for an elementary 
work like this. 



On the Droit-au-Travail. 

9. A passionate cry, however, has gone up from many 
working men that human flesh and blood should not be treated 



The ^ Droit-aii-Travail^ 135 

like dead and senseless commodities by the inflexible laws of 
Demand and Supply. Sometimes they maintain that they 
have an absolute right to have such wages as will sustain them- 
selves and their families in comfort, or at least that the State 
is bound to provide work for them. Under the name of the 
Droit-au-tr avail this doctrine has been very widespread among 
our neighbours across the Channel. It has been tried there 
many times, but always with the most disastrous results. 
Experience and reason show that it is entirely erroneous. It 
is not men who are purchased, but their liabour ; and their 
Labour is a Commodity subject exactly to the same laws of 
Value as any other commodity. If a Shakespeare, or a 
Macaulay, or a Scott were set to do the work of a copying 
clerk, they would not be paid as a Shakespeare, a Macaulay, 
or a Scott, but for the work of a copying clerk. If the rule 
could be applied to Labour it must also be appHed to Com- 
modities. For how is Labour paid ? Out of the price of the 
commodity. If a labourer offers the produce of his labour for 
sale, it is the Demand for the commodity which gives Value to 
his Labour. Or if he is paid wages to produce a commodity, 
the master only pays him those wages because he expects that 
there will be a demand for the commodity : and he can only 
pay wages to him in proportion. To say, therefore, that a 
certain price should be fixed for labour is as much as to say that 
a certain price should be fixed for commodities — an error, in- 
deed, that long prevailed, but which is now completely exploded. 
If, therefore, the price of commodities is left to be governed 
exclusively by the Law of Supply and Demand, it follows as a 
necessary and inevitable consequence that the price of Labour 
must be so too : for it is the expected price of the product 
which is the sole inducement to pay wages, and regulates their 
amount. 

But, in fact, if the d7'oit-au-travail be admitted in principle 
at all, it cannot be restricted to handicraftsmen. If the shoe- 
maker is entitled to call on the State to provide him with shoes 
to make when there are no feet to wear them : if the mason is 



136 Eco7iomics for Beginners. 

entitled to call upon the State to employ him to build houses 
when there is no one to live in them : if the tailor can call upon 
the State to pay him to make endless coats when there are no 
backs to be covered — why the same law is good for the lawyer, 
the doctor, the artist, the author, the editor. Every man who 
chooses to adopt the law as his profession should have a certain 
number of ten-guinea briefs deposited by the State every morning 
on his breakfast table : every painter should be commissioned 
to paint endless Madonnas : every sculptor should be com- 
missioned to carve endless Apollos : every author should have 
a certain number of copies of his work ordered by the State, 
which criminals, perhaps, might be sentenced to read : every 
editor should have a certain number of copies of his paper 
ordered by the State : though it is not easy to see how the State 
could provide patients at will for medical men and surgeons. 

The fallacy which pervades the doctrine of the droit-au- 
travail is manifest. It demands that work shall be found for 
the workmen of the nature they are accustomed to. Now why 
is it that workmen in any particular trade are in distress ? 
Because there is not a sufficient deinand for their labour. 
Because that Species of Labour is over-abundant. All com- 
mercial difficulties arise from over-production, and never from 
under-production. All commercial difficulties arise from there 
being more of a commodity offered for sale than is suitable to 
the circumstances of the time. To provide more, then, of any 
article that is already over-abundant can only aggravate the 
evil. What is really wanted is more Dejnatid. Consequently 
the only result which those who produce, by extraneous assist-- 
ance, more than is wanted can effect, is to aggravate and extend 
the area of suffering, and to reduce those who can maintain 
themselves to the same state as those who are ai ready dependent 
on the pubhc. Consequently, if the right to labour be admitted, 
it is indispensably necessary that the work provided should be 
of some nature wholly different from the workman's usual 
occupation : and, indeed, it ought to be work which does not 
come into competition with any independent workmen. ' And 



Working Men do not Create WealtJi. 137 

this is precisely the difference between the droit- an-tr avail and 
the English poor-law. In England the droit-au-travail is 
admitted. It is English Law that if persons cannot find work 
to support them they are entitled to seek work from the State. 
The sole but essential distinctioti in principle is that the 
doctrine of the droit-au-travail is that the work provided must 
be such as the workman pleases, the English doctrine is that it 
must be such as the State pleases. 

Working men do not create Wealth. 

10. We must now conclude our remarks on this vast sub- 
ject, not because it is exhausted, but, on the contrary, because 
it is so extensive and various that it would require a large 
volume to itself We may simply remark that Demand is the 
sole cause of the Value of Labour, as of its produce, as of every- 
thing else. It is Demand only which causes Labour and its 
Produce to be Wealth. In recent times far too much attention 
has been given to the Producer, and far too little to the Con- 
sumer. Working men, and those who flatter them for the 
purpose of gaining their votes, are constantly in the habit of 
proclaiming that they are the creators of all Wealth. But 
working men are not the creators of all Wealth. Did working 
men create corn, or do they make it grow ? Did working men 
create cattle and flocks ? Did working men ever create any 
material substance whatever ? Did working men create the 
stones of which palaces are built? Did working men create 
the great sciences which have done so much for mankind, and 
by which so much of their labour is directed ? Did they create 
the land ? Did they create the skill and the foresight, and the 
thousands of millions of Credit, by means of which modern 
commerce is carried on ? They did none of these things. 
They bring nothing but their Labour to transform and transport 
the materials furnished by nature, to supply the wants of others. 
And whatever they may do, it is not their Labour which con- 
stitutes a thing Wealth, but the Demand of the Consumer. 



1 3 8 Economics for Beginners. 

Let all the skill and Labour possible be bestowed on any 
product, and if there is no Demand for it, it is not Wealth. 
The Producer and the Consumer are equally necessary to each 
other : it is only by their joint action that anything is Wealth. 
As the whole body of ancient writers, the whole of the first 
school of Economists, and the whole of the Italian Economists 
show, it is Consumption, or Demand, that is the true essence of 
Wealth. At every turn this truth meets us, that it is not the 
Labour of the Producer which constitutes a thing Wealth, but 
the Demand of the Consumer. 

Nothing can be more suicidal than the cry against rich men 
which so many wild Socialists and Communists have raised. 
Where would working men be without rich men '^. If a man 
has not Wealth himself, but only his Labour to sell, what is 
most to his advantage ? Why, of course that there should be 
as many rich men as possible to compete for his Labour. If a 
man has nothing but his Labour to sell, does he go to a multi- 
tude of paupers like himself who cannot buy it, or does he seek 
a concourse of rich men who will compete for it .'' Nothing can 
be more fatal than the cry against Capital so often unthinkingly 
uttered. How could working men exist without Capital? A 
Capitalist is a man who racks his brains to provide work for 
working men : he gives them their reward before he can get 
any for himself : and often indeed he gives them their reward 
and gets none for himself. If anyone wishes to see the effect 
of a destruction of Capital, let him observe the consequences to 
working men of a great commercial crisis like that which has 
recently taken place in the United States, where an enormous 
amount of Credit which served as Wages for working men has 
been annihilated. Working men can no more do without 
Capital than Capital can do without them : and it is to their 
interest that Capital should increase and multiply as much as 
possible to compete for their Labour. When working men 
complain of the tyranny of Capital and the low price of their 
Labour, // is not the tyranny of Capital which is their enemy, 
but the tyranny of tbeir own excessive numbers. Their 



Capital and L abour. 1 3 9 

interest is to multiply their ' tyrants ' and to diminish their own 
numbers. What they want is more Capitalists, more rich men, 
and fewer working men. However, we are happy to think that 
working men in this country are touched to a comparatively 
small extent with the insane frenzy of Continental Socialists 
and Communists, whose object is to destroy all Capital and 
rich men. Their struggle in the main is only to obtain what 
they consider a fair division of the fund which provides both 
Profits and Wages : and it would be impossible to conceive a 
greater benefactor to his country than the one who could per- 
manently reconcile the interests of masters and workmen, and 
put an end to the internecine wars of Capital and Labour. 



I40 Economics for Beginners. 



CHAPTER X. 

ON RIGHTS, OR INCORPOREAL WEALTH. 

1. We have now to consider that gigantic mass of Property 
which exists only in the form of mere abstract Rights, which is 
called Incorporeal Property, or Incorporeal Wealth ; which is 
the third order of Economic Quantities. 

These are mere abstract Rights to something which will 
only come into possession at a future time. But as these 
Rights may be bought and sold, and their Value may be 
measured in money like that of any material chattel, they are 
included under the terms Peainia, Res, Bona, Merx, in Roman 
Law ; under that of ' goods and chattels ' and ' vendible com- 
modities ' in English Law, and that of Wealth in Economics. 

The explanation of the Theory of the Value of land which 
we have given in Chapter IV. will make the nature of these 
Rights readily intelligible. The land is an Economic Quantity 
producing a series of profits in the future ; and each of these 
future profits has a Present Value. But every other profitable 
business whatever in a similar manner produces a continuous 
series of future profits ; and every one of these future profits 
has a Present Value. And these Rights receive different names, 
according to the source from which the Profits spring. 

We have already considered the Value of the Land, and also 
the Theory of Credit, which deals with the profits arising out of 
the industry of men. 

2. Incorporeal Property is of two kinds, each of them com- 
prehending many varieties and enormous masses of property — 



Rights of Obligation. 141 

1. Where the Right of one person to demand a future pay- 
ment is connected with the Duty of some one else to make the 
payment. The Right and the Duty constitute a Nexum or 
Obhgation. This species of property may be called Rights of 
Obligation. It is also called an Annuity ; which is the Right 
to demand a series of payments from some person. 

This species of Incorporeal Property includes Credit, which 
is the lowest form of an annuity, being usually the Right to a 
single payment. Rents of houses, lands, copyrights, patents, 
mines, wires, frames, &c., which are usually a limited series of 
payments, up to Property in land, the funds, tithes, &c., which 
are the Rights to receive payments for ever. 

2. Where the Right only exists to receive some uncertain 
profit ; but no particular person is bound to make that payment : 
and there is only the expectation that some one will. This is 
called the emptio spei, or the emptio rei speratcs, in Roman Law. 
This species of Property may be called Rights of Expectation. 

To this class of Property belong Shares in Commercial 
Companies, Copyrights, Patents, the Goodwill of a business, 
the Practice of a professional man. Tolls, Ferries, Fisheries, 
Shootings, &c. 

In modern times Incorporeal Property includes by far the 
largest amount of existing property. 

On Rigrbts ^Obligation. 

3. The doctrine of Annuities is a curious commentary upon 
the arguments of Aristotle, Dante, and the mediaeval theologians 
that interest for money is unnatural and abominable. The 
theory of annuities entirely depends upon the principle that 
money naturally produces interest : and that interest also pro- 
duces interest, an idea that drove Plutarch wild. 

An Annuity is the Right to receive a series of payments, 
from whatever source arising, and the doctrine of Annuities 
rests entirely on the principle that each of these future payments 



142 Economics for Beginners. 

has a Present Value ; and that the Right to all or any number 
of them may be bought and sold like any article of commerce. 

The Present Value of an Annuity is, therefore, the sum of 
the series of the Present Values of all the future payments. 
Now let us consider a perpetual Annuity, or the Right to receive 
a series of payments at definite intervals for ever. If money 
bore no interest, it is clear that the value of such future payment 
would be exactly equal to the payment itself Consequently 
the Present Value of such an Annuity would be the same as the 
aggregate of the sums to be paid for ever. Therefore to pur- 
chase such an annuity it would be necessary to pay down an 
infinite sum of money, a consequence which is manifestly 
absurd. Hence such a mode of calculating the value of an 
annuity is evidently erroneous. 

Again, suppose that simple interest is charged : then each 
future payment is diminished by a small definite sum of uniform 
amount. And it is evident that to buy an annuity on such a 
principle would involve exactly the same absurdity as in the 
former case. That is, to secure a finite annual payment it 
would be necessary to pay down an infinite sum. And this 
shows that this mode of calculation is also erroneous. 

But if we suppose that compound interest is charged, we 
shall find that each term of the series will progressively and 
rapidly diminish. A larger quantity will have to be subtracted 
from each term in succession, according as the payment is more 
distant. We shall thus obtain a series of quantities in geo- 
metrical progression, the common difference being a fraction :_ 
and by the laws of Algebra we know that such a series, even 
though infinite, has a finite hmit. Each term to be added is 
smaller than the preceding one : until at last they diminish to o : 
and that finite limit is the Present Value of the infinite annuity. 

Hence we see that the Present Value of an annuity must 
always be calculated at compound interest to produce a rational 
result. The Present Value of each term or future payment is 
such a sum as, improved at compound interest at a given rate, 
would amount to the sum in the given time. And the Present 



The Funds. 143 

Value of the whole annuity is the sum of the series of Present 
Values of each term. 

It is clear that compound interest is natural and proper, 
because if a sum of money produces interest, it makes no 
difference whether it is called principal or interest : and as 
soon as interest has accrued from the capital, that interest as 
naturally produces interest as the capital did. 

If the doctrines of so many poets, philosophers, and divines 
had been followed in practice, it would have been impossible to 
have bought landed property ; but Nature herself refutes their 
folly : for if seed corn be planted in the ground it naturally 
increases in a geometrical ratio : and if a person lends another 
money to buy the seed corn, it is natural that he should receive 
a proportionate share of the profit made by the use of his money. 

As a sum of money is always equal to a perpetual annuity, 
we have — 

100/. =a perpetual annuity of 3/., 

or 100/. = an annuity of 10/. for a certain number of years. 

As these quantities are equal to each other, we may either 
pay down a capital sum to buy an annuity : or pay an annuity 
to buy the Right to a capital sum payable either at a definite 
time : or at a certain event : or only at an infinite distance of 
time, or a perpetual loan. 

In Economics the symbol O denotes the Present Value of a 
sum of money that will only be paid at an infinite distance ot 
time : and as the Present Value of any sum whatever, however 
large or however small, paid at an infinite distance of time, is 
exactly the same — i.e. O — it shows that in Economics, as in 
every other branch of Physical Science, one O may be any 
number of times greater than another o, which sometimes 
puzzles juvenile mathematicians. 

On the Funds. 

4. We observed in a former chapter that the State is a 
persona distinct from its individual citizens ; consequently they 



144 Economics for Beginners. 

can trade with it exactly in the same way as amongst them- 
selves. 

When a Government wants to raise a large sum of money at 
once to meet some great public requirement, as a war, or famine ; 
or to construct some great public work, it borrows the principal 
sum, and in exchange for the principal it agrees to pay a fixed 
sum of interest for ever. That is, in exchange for the principal 
sum it sells a perpetual annuity. This Annuity, or Right to 
demand this annual sum, was formerly called a Rent ; just as 
the Right to receive an annuity for the use of lands, houses, 
mines, copyrights, &c., is called a Rent. The name Rent has, 
however, been discontinued in English, though it was used so 
late as the time of Charles II., but it is retained in French, and 
this kind of annuity is called Rentes ; and a fundholder is termed 
a Rentier ; Turgot calls the moneyed interest Vinteret rentier. 

In English this Annuity is termed the Funds in popular 
language, because the capital sum is said to be funded or fixed ; 
the legal name is ' Bank Annuities,' because it is, like the first 
Bank, the contribution of a number of persons. The Govern- 
ment does not bind itself to repay the principal, though it 
reserves to itself the right to do so. It merely offers for sale a 
perpetual annuity ; and if the annuitant wishes to get back his 
principal he must offer the annuity for sale to some one else. 

It must be carefully observed that the Funds are not of the 
nature of a Mortgage, as is sometimes supposed. In English 
law a mortgage is the actual sale of some specific thing, as a 
particular piece of land in exchange for a sum of money, with 
the right of repurchasing the land upon repaying the principal 
and interest. A mortgage deed is not Credit, but the title 
deeds to a specific piece of land. 

But the Funds are Credit : they are mere abstract Rights to 
be paid out of the income of the country. They are not titles 
to any specific things. This has a very important bearing 
when persons try to estimate the ratio of the National Debt to 
the general Wealth of the country. Sometimes an estimate is 
formed of the material Wealth of the country, and the Funds 



On Tithes, 145 

are compared with that. But this is a very erroneous way of 
considering the matter. The Funds are a liabihty to pay about 
28,000,000/. a year out of the general income of the country : 
and the true way of estimating the weight of the national debt 
is to compare this annuity with the annual income of the 
country ; and by doing this it will be found that the weight of 
the Debt is very much less than is supposed. 

The Government, however, often agrees to pay off a certain 
amount of the principal by annual instalments. In such cases 
these annuities are not called the Funds, but Terminable An- 
nuities. 

On Tltbes. 

5. In Ecclesiastical Law Tithes are the Right to demand 
the tenth part of the yearly increase from land : the stock upon 
land : and the personal industry of the people. 

Tithes of the increase of the land itself, such as corn, hay, 
hops, fruits of all sorts, are called prcedial Tithes : Tithes of 
the increase of the stock upon the land, such as calves, pigs? 
lambs, poultry, eggs, butter, cheese, &c., are called mixed 
Tithes ; and Tithes of the profits of personal industry of all 
sorts — handicrafts, arts, and professions — are called personal 
Tithes. 

Some persons may, perhaps, be surprised to hear that by 
Law Tithes are not only due from the owners of land, but also 
from the industry of every person in the country. Every great 
merchant, every advocate, every physician, every engineer, 
every artist, every author, every commercial enterprise. Banks, 
Railways, Newspapers, Insurance Companies, are in reality by 
Law bound to pay one-tenth of the yearly produce of their 
industry equally with the owners of land. Spelman says that 
in his day, in many parts of the country, servants paid tithes on 
their wages. 

But all these classes of persons have long ago emancipated 
themselves from this duty and kept them to themselves : and 

L 



146 Economics for Beginners. 

the landowners are the only class of the community who have 
continued to pay them. Up till 1836 Tithes were demandable 
in kind : but they were then commuted into a Rent charge, 
which varies according to the price of corn. 



Policies of Insurance. 

6. Another large class of Incorporeal Property is Policies of 
Insurance. As we have seen that a single sum of money may 
be paid down to buy an Annuity : so equally an Annuity may 
be paid to buy a single sum payable on some contingency, such 
as death, or attaining a certain age ; or to indemnify losses by 
fire, shipwreck, or other accidents. This shows how an Obli- 
gation may be Capital : a Policy is an ObUgation of the com- 
pany ; but it produces them a revenue : and hence it is Capital 
to them. 

All these Rights of Obligation are called choses-in-action : 
because there is always some person who is bound to discharge 
them, and if he refuses to do so, an action will lie against him. 

On Rig-hts of Expectation. 

7. Rights of Expectation differ from Rights of Obligation in 
this, that though the Right is the same to receive the profits, 
yet no particular person is bound to make the payment ; but 
it is only hoped or expected that some one will. This species 
of Property, therefore, is not a chose-m-action, though it is 
sometimes erroneously included under that title. It is called in 
Roman law emptio spei, or eniptio rei speratcB ; it is merely the 
Right to an expected or hoped for profit : and hence it may be 
called a Right of Expectati€7i. 

To this class of Incorporeal Property belong Shares in 
Commercial Companies of all sorts : the Goodwill of a business : 
the Practice of a Professional man : Copyrights : Patents : 
Tolls : Ferries : Shootings and Fisheries : Street crossings. 



Shares in Commercial Companies. 147 



On Shares in Commercial Companies. 

8. A class of Incorporeal Property which has attained 
gigantic magnitude in modern times is Shares in Commercial 
Companies of all sorts — Banks, Railways, Steamships, Gas, In- 
surance, Docks, and many others. The Commercial enterprises 
of modern times are on such a gigantic scale that they can only 
be carried on by great associations of persons. These persons 
are formed into Companies ; and, as we have observed, the 
Company is a persona distinct from its individual members. 
The individual members pay over their contributions to the 
Company, and then lose all right to it ; and they receive cer- 
tificates entitling them to share in the profits made by the 
trading in the proportion in which they have subscribed to the 
Capital, These certificates are called Shares. The members 
of a Joint Stock Company are like the fundholders ; they have 
no right to demand back their subscriptions from the Company ; 
but if they want their money, they can sell their shares in the 
open market. 

The Value of the Shares in no way depends upon the sum 
originally paid for them : but entirely on the income or profits 
made by the trading of the Company ; and of course the average 
rate of interest. If the profits made by the Company fall short 
of the average rate of interest, the Shares fall to a discount : if 
the Profits made exceed the usual rate of interest, the Shares 
may rise to an enormous premium. The most remarkable 
difference in Value between the original Capital paid in and the 
Value of the Shares probably that ever existed is the New 
River Water Company. When Sir Hugh Myddelton and his 
sagacious co-adventurers in the reign of James I. constructed 
this canal, so little were the blessings of pure water understood 
by the citizens of London that the patriotic projector was ruined 
and obliged to sell his shares. However, the work was at length 
eflfected, and the shares upon which 100/. were paid originally 
sold in 1878 at the rate of 93,000/. 

L 2 



148 Economics for Beginners, 

The Goodwill of a Business. 

9. Analogous to the Shares in a Commercial Company, 
only that it is not recorded on paper and sold in the market, is 
the Goodwill of a business. When a trader has established a 
reputation in any commercial way the expectation of future 
profits is a valuable Property, which he can sell and dispose of 
quite separate from the house or shop, or the goods actually in 
the shop. This property is fully recognised by Courts of Law as 
part of the fruits of accumulated industry, just as much as any 
material product. But, as it is always fixed to a particular place, 
it may be called Incorporeal Real Property. 

We may cite an instance which may interest our readers. 
Boswell says that Johnson was appointed by Thrale, the great 
brewer, one of his executors. In that capacity it became his 
duty to sell the business. When the sale was going on 'John- 
son appeared, bustling about, with an inkhorn and pen in his 
button-hole, like an Excise man : and on being asked what he 
really considered to be the value of the property which was to 
be disposed of, answered, " We are not here to sell a parcel of 
boilers and vats, but the Potentiality of growing rich beyond 
the dreams of avarice." ' This latter phrase was merely John- 
sonese for the Goodwill of the business. The price realised 
was 135,000/., and it was merely the Right to the future profits 
of the business. 

When the great banking house of Jones, Loyd, and Co. sold 
their business to the London and Westminster Bank, it was said 
that the price given was 500,000/. 

In a similar way every trading house in the country has a 
Goodwill of more or less value, which is a saleable commodity 
like any material chattel. 

The Practice of a Professional XMCan. 

10. Another species of Incorporeal Property analogous to 
the Goodwill of a business is the Practice of a Professional 



On Copyrights. 149 

man. Not only do dealers in material products create a busi- 
ness by their industry and labour, which may be sold, but also 
dealers in immaterial products, such as medical men, solicitors, 
&c., do the same, and it is capable of being sold. This is called 
a Practice. If a young doctor or solicitor wishes to start in 
business it is very usual for him to buy a Practice, and of course 
such a purchase is Capital. 

On Copyrights. 

11. Another species of Incorporeal Property of constantly 
increasing magnitude is Copyrig:ht, or the Right to the profits 
to be made by the sale of works of literature and art : or the 
Property in Ideas. When an author publishes a successful 
work, the Right of multiplying copies of it and of receiving the 
profits from so doing is a valuable property, termed Copyright. 
Not only does this extend to the actual works so published ; 
but also to the names of periodicals. 

Suppose that anyone were to conceive the audacious idea 
of buying up the ' Times ' newspaper : what would its price com- 
prehend 1 Would it be merely the brick buildings, the steam 
engines, the presses, and the types, which may be seen and 
handled ? The price of these things would be utterly insignifi- 
cant. The fact is that by the energy and skill with which the 
* Times ' has been conducted, it has established an enormous 
demand for it ; and as innumerable people require to make their 
wants known, they go to the ' Times ' to advertise in it. These 
advertisements produce an annual revenue whose value can be 
approximately estimated, and the value of the 'Times' is the 
value of that expectation or potentiality of future profits. 

There is not only Copyright in actual material publications, 
but also in dramatic representations and things of that nature. 
It was stated that the Copyright in a popular song, ' Slap bang, 
here we are again/ sold for 2,000/. 



150 Economics for Beginners. 



On Patents. 

12. Anotner form of Property in Ideas is a Patent, which is 
a Right granted by Letters Patent from the Crown for the ex- 
clusive sale of some mechanical invention. We may observe 
that no one can have a patent for a principle, but only for some 
particular application of it. That is, no one can have a patent 
for a Discovery, but only for an Invention. As soon as a 
general scientific principle is discovered it becomes universal 
property : and private persons can appropriate some particular 
application of it to practical use. 

Advowsons and Benefices. 

13. Another form of Incorporeal Property is the Right to 
receive the ecclesiastical dues in some locality for performing 
religious services. This Right is called a Benefice : and the 
Right to nominate the person to these Benefices is called an 
Advowson. 

Tolls and Ferries. 

14:. Tolls and Ferries are the Right to demand compensa- 
tion for establishing roads, ferries, docks, &c. 

Shooting-s and Fishlngrs. 

15. Another species of Incorporeal Property which has- 
increased very much in magnitude in recent years are Shootings 
and Fishings. These are not the Rights to any particular birds 
or any particular fish, but the Right of shooting at birds and 
killing them if the sportsman can, and the Right of trying to 
catch fish. 

Street Crosslngrs. 

16. We may mention as a last species of Incorporeal Pro- 
perty street crossings. These are made the subject of regular 



Street Crossings. 151 

property by the poorer classes, just as much as landed estates, 
and they are bequeathed from one to the other and are made the 
subject of marriage portions. There cannot be a more striking 
example of the e?nptio spei than these street crossings, as no 
one is bound to pay toll for them : their receipts depend purely 
upon the charitable feelings of the passengers : and yet they 
are Capital to their occupiers. 



152 Economics for Beginners, 



CHAPTER XI. 

ON THE FOREIGN EXCHANGES. 

1. In the preceding chapters we have given a sketch of the 
mechanism of the internal commerce of the country : we must 
now give a very brief outhne of its external commerce, which is 
comprehended under the title of the Foreign Exchanges. 
There is of course no difference in principle between the two ; 
because the principles of commerce are uniform throughout the 
world ; but there is somewhai more compHcation in the details ; 
because nations use different systems of coinage ; and they 
establish artificial barriers between their mutual intercourse. 

On the Mea7img of an Exchangre. 

2. An ' Exchange ' in commerce is where a person pays his 
Creditor by transferring to him a Debt due to himself from 
some one else. 

When a person pays a Debt by a Bank Note, or a Cheque 
on his banker, it is an ' Exchange.' It is an example of Novatio, 

Two passengers are travelling in an omnibus. The fare is 
sixpence. One passenger pays the conductor a shilling. The 
conductor is then indebted to him in sixpence. The other 
passenger has a sixpence in his hand ready to pay his fare. The 
conductor by a nod tells him to give the sixpence to the first 
passenger. The whole transaction is an ' Exchange.' 

Three parties and two debts are thus necessary to an Ex- 
change. The Exchange is that branch of commerce which 



On the Nominal Exchange. 153 

treats of the remission and settlement of Debts between 
different places by Paper Documents, and the exchange of the 
money of one country for that of another. 

The state of the Exchanges depends upon two distinct 
things : i. The state of the Moneys of the different countries ; 
and secondly, the state of commercial dealings between the 
countries. The state of the exchanges which depends upon the 
Moneys of the countries is called the NomiDal Exchange : the 
state of the exchanges which depends upon the commercial 
dealings between the countries is called the Real or Commer- 
cial Exchange. 

On the XTomlnal Exchange. 

3. Suppose that the Coinages of two countries are of the 
same metal, and that the coinage of one country is taken as the 
standard ; then the quantity of the coin of the other, which 
contains exactly the same quantity of pure metal, is called the 
Par of Exchange between the two countries. 

Suppose that the exchanges between England and France 
were estimated in gold. There is as near as possible one- 
fourth more gold in an English sovereign than in the French 
Napoleon, or 20-franc piece. If the English coinage were taken 
as the standard, it would be equal to 1-25 Napoleon : and 1-25 
would be called the Par of Exchange between England and 
France. The French exchanges are, however, expressed in 
francs, which are silver coins. If the sovereign contained 
exactly one-fourth more gold than the Napoleon, we should say 
that 25* was the Par of Exchange. 

If from any cause whatever the English coinage became 
degraded, worn, or clipped, sovereigns would not buy so 
many francs as if they were of full weight. If they were in a 
very bad state they might perhaps only buy 22 francs, and 
this would be called a fall in the Foreign Exchanges. Or if 
an English merchant was bound to pay 2,5oof. to his creditor 
in Paris, he would have to give more than 100/. to buy the 



154 Economics for Beginners. 

2,5oof. In this point of view the Exchange would be said to 
have risen so much per cent, against England by the amount of 
that difference. 

If the Coinage is in a depreciated state a merchant can buy 
a less amount of Foreign Coin with it — that is called a Fall in 
the Foreign Exchanges. 

If he wants to buy a fixed amount of Foreign Coin he must 
give more of the depreciated coin than he would have to give if 
it were of full weight — that is called a Rise in the Foreign 
Exchanges. 

These two expressions mean the same thing. 

It is evident that this adverse state of the Exchanges will 
continue so long as the English Coinage remains depreciated : 
and that the restoration of the Coinage to its proper state will 
at once rectify the Exchanges. 

It is only between countries which use the same metal as 
their standard that there can be a fixed Par of Exchange. If 
they use different metals, such as gold and silver, the relative 
value of these metals constantly varies in the market of the 
world, like that of any other two commodities ; and it is no 
more possible to have a fixed price of one in terms of the other 
than to have a fixed legal price of wheat. The only correct way 
is to speak of the usual Rate of Exchange between them. 
England uses gold and France uses silver as the standard ; con 
sequently there can be no fixed Par of Exchange between them. 

On the Real or Commercial Exchange. 

4. We now have to consider the state of the Exchanges 
arising from the commercial transactions of the country. 

Inland Exchange. 

We will now show how an ' Exchange ' is exemplified in 
practice. 

Suppose two cities, London and Edinburgh. Suppose a 
trader A in London is debtor to B in Edinburgh : and suppose 



Inland Exclmnge, 155 

that B' in Edinburgh is also indebted to A in London. Then 
A sends B an order upon B' : B' pays the amount to A ; and 
the claims between the parties are settled. This is exactly 
similar to a person paying his creditor in the same town by 
giving him a cheque on his banker. 

This is an example of an exchange with three parties : as an 
example of an exchange with four parties, suppose that A in 
London owes B in Edinburgh a certain sum : and that B' in 
Edinburgh owes A' in London the same sum : then A in 
London pays the amount to A% and receives from him an order 
on B^ for his debt ; A then sends this order to B, who presents 
it to B\ and receives the money from him. Thus the whole 
debts between the parties are settled by making payments 
in the same town instead of sending the money to pay both 
debts from one town to the other. 

When the debts between London and Edinburgh are 
exactly equal, they may all be discharged without sending any 
specie. The exchanges are then said to be at par. 

Supposing that the debts are not equal, and that Edinburgh 
wishes to send more money to London than it has to receive, 
then the demand for bills is greater than the supply : and as 
everyone would rather send a bill than cash, as it is cheaper to 
do so, those who had to send money would bid against each 
other for the bills in the maiket, as for any merchandise, and 
the price of them would rise, as a premium would have to be 
paid for a bill on London. 

As a matter of fact there is always a greater amount of 
money seeking to flow from the country to London than the 
contrary : consequently the demand for bills on London in the 
country is greater than the supply : and therefore inland bills 
upon London are always at a premium. 

This premium is computed by time. If a person in Edin- 
burgh wants a bill at sight on London he must pay one shilling 
per cent., or four days' interest. This is called the Time Par of 
Exchange between Edinburgh and London. There is a 
similar premium on bills, or Par of Exchange, between all other 



156 Economics for Beginners, 

towns in the country on London. This is called Inland 
Exchange. 

The exchange of the country upon London is said to be in 
favour of London and against the country. But it is only un- 
favourable to those who wish to send money, or to those who 
wish to buy bills. It is equally favourable to those who have to 
receive money, or to the sellers of bills. 

From this example it appears that when bills in one place 
upon another are at a Premium the Exchanges are adverse to 
the first place ; because it has more money to pay than it has 
to receive : and the demand for bills is greater than the supply. 
On the contrary, when the first place has more money to receive 
than to pay, bills upon the second place will be at a Discount, 
because the supply of bills is greater than the demand. 

On the Limits of the Variations of the Exchanges. 

5. Hence the Price of bills to those who have money to 
send will be at a Premium or a Discount, according as there is 
more money to be sent away or to be received. But the 
Premium cannot rise higher -than the Cost of sending Bulhon : 
because if it did so persons would prefer to send the Bullion 
itself. For the same reason the Discount can never fall below 
the Cost of sending Bullion : consequently the variation of the 
exchanges are restricted to the Limits of twice the cost of 
transmitting Bullion between the two places. 

These Limits of the Rate of Exchange are called Specie 
Points ; because when the Exchanges reach them, specie may 
be expected to flow in or out, as the case may be. 

On Foreign Exchange. 

6. The principle of Foreign Exchange is exactly the same 
as that of Inland Exchange, only it is somewhat more compli- 
cated, as it involves the exchanges of the moneys of the different 
countries. 



On Foreign Exchange, 157 

In Exchange between two places the Money of one country- 
is always taken as Fixed, and the Exchange is reckoned in the 
Variable Quantities of the Money of the other country given for 
it. The former is called the Fixed or Certain price, and the 
latter the Variable or Uncertain price. 

Between London and Paris the /. sterling is the fixed price, 
and the variable sum is reckoned in francs and cents given for it. 

On the contrary, between London and Spain the Spanish 
dollar is the fixed price, and the variable sum is reckoned in the 
number of pence which are given for it. 

When a certain place is taken as a centre, if the fixed price 
is the money of that place it is said to receive the variable 
price : on the contrary, when the money of that place is the 
variable price, it is said to give the variable price. 

Thus London receives from Paris so many francs and cents 
for the /. sterling ; and London gives Spain so many pence for 
the dollar. 

The principle of the Exchange between London and foreign 
places is of course exactly the same as the exchange between 
London and Edinburgh. When the Exchanges are against 
London, Foreign Bills will be at a premium : when they are in 
favour of London they will be at a discount. 

But there is very great complication in the details ; because 
London receives the variable price from some places, and gives 
it to others : consequently the expressions will have to be 
reversed according as they are applied to these different places. 

For instance, between London and Paris, if the Exchange is 
against London and bills upon Paris rise to a premium, the /. 
sterling will purchase fewer francs, and therefore the Rate of 
Exchange will fall below par. 

But when the Exchange is favourable to London, and there- 
fore Bills upon Paris at a discount, the /. sterling will purchase 
more francs, and consequently the Rate of Exchange will rise 
above par. 

And the same is true of all places from which London 
receives the variable price. 



158 Economics for Beginners. 

But the case is exactly the reverse with respect to all places 
to which London gives the variable price. 



On Exchange Operations. 

7. Exchange operations consist in buying, selling, importing, 
and exporting bullion, called ' Bullion Operations/ and buying 
and selling Bills, called ' Banking Operations.' 

It may happen from various causes that it may be nrore 
profitable to possess bullion at one place than at another. 
Whenever this is the case Exchange operators export bullion 
from one place to the other for the sake of the profit. They 
create bills upon such a place. They draw upon their corre- 
spondents, discount their bills, and remit the proceeds to meet 
their drafts when due. 

Suppose, for example, that ihe Rate of Discount was 2 per 
cent, in London and 6 per cent, in Paris : that would mean that 
a bullion merchant could buy gold in London for 2 per cent, and 
sell it in Paris at 6 per cent. It would be just as if farmers 
in England were to sell their wheat at 4,0^. a quarter when the 
price of wheat in Paris was 8oj-. a quarter. The consequence of 
this would be clear : the corn dealers would buy up all the corn 
they could in England and export it to Paris. And this drain 
of wheat would go on until the price of it in England had risen 
to such a price as to destroy the profit of the operation. It is 
exactly the same with bullion. So long as English bankers sell 
their gold at 2 per cent, while the price is 6 per cent, in Paris, 
bullion dealers will buy as much gold as they can to send it over 
to Paris : and the only way to stop this is by destroying the 
profit : that is, English bankers 7mist raise the price of their 
gold, or Raise tbe Rate of Discount. 

8. We will now take a very simple example to illustrate the 
general nature of the operations which influence the movements 
of bullion. 

Suppose an English merchant sends i ,000/. worth of goods to 



On Exchange Operations. 159 

Bordeaux : his agent there would have to consider whether it 
would be more advantageous to send back the proceeds of the 
goods in money, or in some native product. 

The principal native product of Bordeaux is wine : and 
whether the agent should send his principal wine or not would 
depend on the price of the wine at Bordeaux and in London. 
If from any reason the price of wine happened to be very low in 
London and high at Bordeaux, he would not send wine ; and if 
there were no other native product he would have to send 
specie. 

If Bordeaux had only one native product, wine, the chances 
of finding the markets both at Bordeaux and London in a 
favourable state for importing produce would be limited to that 
single article. If it had other products the chances would be 
increased of finding products to suit the markets : and the 
chances would evidently be multiplied according to the number 
and variety of its products. Hence is seen the great importance 
of having as great a variety as possible of products in a market, 
because the more chances there are that commercial indebted- 
ness may be settled by products rather than by specie. 

Specie is always the most unprofitable article of commerce 
between countries, because the charges for its transport must 
be paid out of itself, and cannot be added to its price, as those 
of merchandise are. The price of merchandise also is always 
enhanced in the usual course of trade as it passes through the 
hands of successive dealers. Hence the transmission of bullion 
from country to country always shows that the export of products 
has become unprofitable. 

From this also we see that the scarcity and deamess ot 
native products is an infallible cause of the export of specie 
from a country : on the contrary, an abundant supply of products, 
both domestic and foreign, is a certain cause of its import into 
a country, as people flock to buy in a well-stocked and cheap 
market. 

When a great and unexpected dearth of some object of 
prime necessity occurs in England, such as the failure of the 



i6o Economics for Beginners, 

potato crop or the harvest, its price rises enormously high : 
and the infallible result is to cause a great export of specie for 
the time being, because our necessity for food is much more 
pressing and immediate than the necessity of foreign countries 
for our goods, or their capability of purchasing them. And the 
only way to arrest such a drain is to effect such a reduction in 
the price of British goods as to make it more profitable to 
export goods than specie. It has already been shown that 
Credit has the same effect on prices as Money, and in cases of 
a great crisis the effects of Credit are often very mischievous by 
sustaining the price of home produce at such a level as to 
prevent its export. In such times there is a great danger of 
an excessive quantity of specie being exported, so as to endanger 
the whole structure of our system of Credit. The object of the 
Bank Act of 1844 is to cause such a reduction of the amount of 
Credit in circulation at such periods as to prevent a dangerous 
drain of specie. 

Suppose also that, in consequence of some miscalculations 
and erroneous expectations, our merchants have so over-stocked 
the markets with our goods that their price has fallen so low as 
to cause a loss : this is called over-trading : when this is the 
case it would obviously be absurd to export more goods to 
incur further losses. The consequence is that nothing but 
specie will go to buy goods in that market. Hence also we 
see that over-trading is a sure cause of a drain of bullion from 
the country. 

Over-trading and a failure of the cereal crops of this country 
are each of them sure causes of a drain of bullion. The most - 
disastrous event for the commerce of this country is when both 
these circumstances happen simultaneously. It is like a spring 
tide of disaster. The great monetary panic of 1847 was brought 
on by several years of over-trading, followed by successive 
failures of the staple food of the people of England and Ireland. 



Monetary and Political Convulsions. i6i 

On Foreign Loans, Securities, and Remitta7ices as affecting 
the Excha7iges. 

9. Foreign Loans, Public Securities, Bonds of Commercial 
Companies, now form a regular article of import and export 
between countries, and affect the Exchanges exactly like any 
other article of merchandise. Bills of Exchange and the drafts 
of private families also have greatly increased in recent times. 
But as all these pass through the Post Office, and not through 
the Custom House, it is impossible to ascertain their amount. 
Hence the subject of the Foreign Exchanges is an insoluble 
puzzle to any persons who look only at the official return of 
merchandise published by the Board of Trade. 



On Monetary and Political Cojwulsions as affecting 

the Exchanges. 

# 
10. Monetary and Political Convulsions in our modern 

artificial state turn the Exchanges in favour of a country ; 
unless this effect is prevented by the issue of Inconvertible 
Paper. Such convulsions are always attended by a great 
destruction of Credit, which while it existed performed the 
function of Money. As soon as this Credit is destroyed there 
is an intense demand for Money. Money, therefore, rises im- 
mensely in Value, both with regard to Goods and Debts : and 
it immediately begins to flow in from neighbouring countries. 
In 1799 there was a great commercial crisis at Hamburg. 
Discount rose to 15 per cent. : that immediately drained bullion 
from England. In 1825 the Bank, by a long Series of over- 
issues, had turned the Foreign Exchanges against the country : 
but as soon as the great panic set in the Foreign Exchanges 
turned in favour of the country. The same thing happened in 
1847 : and in innumerable other instances. 



M 



1 62 Economics for Beginners. 



On the Means of Correcting an Adverse Exchange. 

11. There are, then, three great Economic Quantities, 
Products, Bullion, and Debts, all seeking to be exchanged, all 
flowing from where they are cheaper to where they are dearer. 

But all this mighty mass of Credit is based upon Bulhon, 
and if the Bullion is suffered to ebb away too rapidly the whole 
superstructure is endangered : and then follows one of those 
dreadful calamities a Monetary Crisis. 

If an adverse state of the Exchange is caused by a depre- 
ciated currency, there is no cure but a restoration of the 
Currency to its proper state. If it is caused by commercial 
indebtedness there are only two methods of correcting it, an 
export of produce and a Rise in the Rate of Discount. 

It is sometimes alleged that an adverse state of the exchange 
is itself an inducement to export, on account of the premium at 
which the Bills can be sold. But a very much more certain 
means of producing an export is the lowering of their price. 

A difference in the Rate of Discount between two countries 
more than sufficient to pay for the transmission of bullion will 
produce a flow of bullion from one to the other. But as the 
cost of transmission falls on the operator, the difference requires 
to be more considerable than might appear at first sight. And 
if the Bills be at three months, the profit will be only one-fourth 
of the apparent difference. Thus Mr. Goschen says that there 
must be a difference of 2 per cent, between London and Paris 
to attract gold from one to the other. 

But whatever the difference may be, the method is abso- 
lutely certain. Directly the Rate of Discount is raised here, 
traders cease to export Bullion : they begin to import it, and 
Continental bankers and brokers increase their demand for 
English bills. As the Rate rises the demand will increase, 
until at last the price reaches the specie point, and gold begins 
to flow in, until the necessary equilibrium is restored between 
Bullion and Credit. 



On Correcting an Adverse Exchmige. 163 

We thus see what an extremely complicated subject the 
Foreign Exchanges is : because all these different causes may 
be acting in all sorts of different ways in conjunction or oppo- 
sition ; and of course it requires an intimate knowledge of 
commercial affairs at any particular time to discern how each 
is operating. 

This must suffice here for a general outline of the subject. 



QUESTIONS FOR EXAMINATION. 



INTRODUCTION. 

How may the Schools of Modern Economists be grouped? 

Give any instance of the importance of the word Wealth. 

What is meant by saying that Political Economy is a Physical Science ? 

What is the original meaning of the term Political Economy ? 

What did ancient writers mean by the word Wealth ? 

How many different kinds of Wealth did they notice ? 

What was meant by Wealth when the word was first used in modern 
times ? 

Where and when did the first School of Economists arise in modern 
times ? 

Explain fully what they meant by the expression ' Production, Distri- 
bution, and Consumption of Wealth.' 

What did they mean by Productive Labour ? WTiich classes did they 
call Productive, and which Unproductive? and why? 

What produced a reaction against them ? 

What does Smith mean by Wealth ? 

Mention any inconsistencies in Smith's use of the term Wealth. 

Mention any objection to the System of the Second School of 
Economists. 

What is the definition of the Science adopted by the third School of 
Economists ? 

Give some examples showing its advantages. 



1 66 Economics for Beginners. 

Explain how Economics is a physical Science, and also a moral 

Science. 
Why is Economics a preferable term for the modern Science, to 

Political Economy ? 



CHAPTER I. 

Explain the meaning of the term Economics 

Define Wealth. 

How many distinct kmds of Wealth are there ? 

How many distinct kinds of Exchange does Commerce consist of ? 

Define Property. 

Mention any words which mean Rights, which are S'^metimes sup- 
posed to mean Things. 

Enumerate the diffei-ent kinds of Property. 

How may the Positive and Negative Signs be applied to Property ? 

Distinguish between z.jus in rem and 2^. jus ad rem or in personam. 

How is Property ' Goods and Chattels ' ? 

Define Value. 

Explain the necessity for Money, 

How is Money a form of Credit ? 

Define Credit. 

What is meant by Sale or Circulation ? 

What is meant by Circulating Medium ? 

What is the legal meaning of Currency ? 

Enumerate the different kinds of Currency. 

Define Price, Discount, and Interest. 

Explain why the terms Production and Consumption are not suitable for 
the modern Science of Economics. 

How many different kinds of Production are there ? 

What is Cost of Production ? 

What is Profit ? and Rate of Profit ? 

What is Productive Labour ? 

What is Rent and Hire ? 

Define Capital. 

In how many ways may Capital increase ? 

Define Fixed and Floating Capital ; and give instances of each. 

What is meant by Payment ? and Satisfaction ? 

Explain the meaning oi persona and res in Roman Law. 



Questions for Examinatio7t. 167 



CHAPTER II. 

What does the complete Theory of Value comprise ? 

Define Value. 

Give instances of Value. 

Can there be a general rise of Prices and Values ? 

Is the expression Intrinsic Value correct ? 

Distinguish between Diminution in Value and Depreciation. 

What is the Cause of Value ? 

Is it true that Labour is the cause of Value ? 

What is the General Law of Value ? 



CHAPTER in. 

What is meant by Bullion and Coin ? 

What is meant by the Mint Price of Bullion ? 

What would an alteration of the Mint Price of Bullion mean ? 

What is meant by the Market Price of Bullion ? 

If the Market Price of Bullion rises above the Mint Price what does it 

prove ? 
What is Gresham's Law of the Coinage ? 
What is a Pound ? 

What is the Mint Price of Gold ? and when was it fixed ? 
How did Gold become the legal measure of value in England ? 
What is the present law respecting the Silver and Bronze Coinage ? 



CHAPTER IV. 

Who brought the Theory of Credit to perfection ? 

What is the popular meaning of Credit ? 

Name any writers who have said that Credit is Capital. 

How is an Obligation created ? 

What do Sciences deal with ? 

How are these distinguished ? 

How are the Algebraical Signs applied to Time ? 

Give any instances of the terms Positive and Negative used by Jurists. 



1 58 Economics for Beginners. 

Give a short account of the Theory of the Value of Land. 

What is meant by saying that Credit is Negative Capital ? 

What are the Three Ambiguities in the Theory of Credit ? 

What is meant by saying that Debts are Negative Quantities ? 

"What is meant by saying that Debts are Goods and Chattels ? 

How is a Credit, or Debt, transferred ? 

In how many ways are Obligations extinguished ? 

How does the Release of a Debt extinguish an Obligation ? 

When does + lOO/. extinguish — loo/. ? 

1 low does a Payment in Money extinguish a Debt ? 

What is Novation ? Give instances. 

What is Compensation ? Give instances. 

What are the two branches of the System of Credit ? 



CHAPTER V. 

Through how many hands do Goods or Commodities pass in the 

usual course of business ? 
How is Credit used in the transfer of Commodities ? 
Explain how foreign merchants settled their Bills by Compensation. 
Give an instance how Credit may be used to form a New Product. 



CHAPTER VI. 

What is the meaning of the word Bank ? 

Give a short account of the mechanism of Banking 

How does a banker discount a Bill ? 

Define a Banker. 

Explain how a customer may Operate on his Account. 

What is the nature and utility of Cash Credits ? 



CHAPTER VII. 

Define Profit and Rate of Profit. 

Give instances of the difference of Rate of Profit according to the 
intervals in which it is made. 



Questions for Examination. 169 

Can Profits and Wages increase together ? 
"Why are the Profits of country tradesmen so large ? 
Distinguish between Interest and Discount. 

What kind of Property has its Value determined by the Rate of In- 
terest ? 
Give any instances of a very high rate of interest being paid for Money. 



CHAPTER VIII. 

Define Rent. 

Explain how Rent arises. 

Does the Payment of Rent raise the price of corn ? 

Does the Payment of Rent affect the prices of goods in shops ? 



CHAPTER IX. 

What is the Economical Definition of Labour ? 

Is Labour a Commodity ? 

What are Wages ? 

What is the Wages Fund ? 

Does the price of food regulate the Rate of Wages ? 

What is the Division of Labour ? Give any instances of its effects in 

increasing the quantity of products. 
Which is the Fund which provides Profits and Wages ? 
State the different views sometimes held by Masters and Workmen as 

to its division. 
What two kinds of Labour are there in commerce ? 
Does the same rule apply to both of them as lo their remuneration ? 
What is Co-operation ? ' 
What is a Strike ? and a Lock out ? 
What is the Droit-au-travail ? 
Is it true in principle ? 
What is the distinction between the droit-au-travail and the English 

Poor Law ? 
Is it true that working men create all Wealth ? 
Is it for the interest of working men that Capital should be destroyed ? 



170 Economics for Beghmers, 



CHAPTER X. 

How does the Theory of the Vakie of Land render the nature of In- 
corporeal Property intelligible ? 

Of what two kinds is Incorporeal Property ? 

Give instances of Rights of Obligation. 

Explain the nature of the Funds. 

Are the Funds a Mortgage on the Property of the country ? 

What are Tithes ? 

From whom are they legally due ? 

What is a Policy of Insurance ? 

What are Rights of Expectation ? 

What is a Share in a Commercial Company ? 

What is the Goodwill of a Business ? or the Practice of a Professional 
man? 

What are Copyrights and Patents ? 

What are Advowsons and Benefices ? 

What are Tolls and Ferries? Shootings and Fishings ? Street Crossings ? 



CHAPTER XL 

Under what title is the Foreign Commerce of the country in- 
cluded? 

What is meant by an ' Exchange ' in Commerce ? 

What is the Nominal Exchange ? 

A bad State of the Coinage is sometimes said to produce a Rise in the 
Foreign Exchanges, and sometimes a Fall : reconcile these two 
expressions. 

What is the Real or Commercial Exchange ? 

Exemplify an Exchange between three parties and between _/2?z/r parties. 

What are the Limits of the Variations of the Exchange ? and their 
name? 

How are the Exchanges between different countries reckoned ? 

What do Exchange operations consist in ? 

Give an example of an operation in Foreign Commerce. 



Questions for Examination. 171 

What causes produce a drain of Bullion ? 

How do Foreign Loans, Securities, and Remittances affect the Ex- 
changes ? 
How do Monetary and Political Convulsions affect the Exchanges ? 
What are the means of Correcting an Adverse Exchange ? 



WORKS BY THE SAME AUTHOR. 



'An Economist of the first order.' Journal des D£bats 

• Mr. MacLeod's works are a good first-fruits of the new era of 
Economic thinkers . they are beyond all question the most effective 
exposition of the first principles that are to be worked out of the 
Economic practice of this age. ' Scotsman. 



I. 

A DICTIONARY OF POLITICAL ECOlfOMY: Biographical, 

Bibliographical, Historical, and Practical. 

Vol. I. Second Edition. {Preparing. 

Vol. n. Completing the work. [In progress 

' It is a great service to render to a science to fix well its nomen- 
clature, and to define exactly and clearly its fundamental ideas. Such 
is the task to which Mr. Macleod brings a patience beyond proof, and 
the learning of a Benedictine.'— i^r^w^' M. Michel Chevalier's 
Report on Mr. MacLeod's Works to the Institute of France. 

'The Dictionary strikes the mind by its proportions. A single 
person is executing by himself, with a remarkable superiority, a work 
which in France required the assistance of 20 (38) distinguished writers, 
directed by an able editor.' L'Economiste FRAN9AIS. 



Works by the same Author. 



11. 
A SPECIMEN DIGEST OF THE LAW OF BILLS OF 

EXCHANGE, BANK NOTES, AND CHEQUES. 

[^N'ot published. 

On the examination of this specimen Digest, the Royal Commissioners 
for the Digest of the Law unanimously selected Mr. Macleod to prepare 
the Digest of the Law of Bills of Exchange, Bank Notes, &c. 

In delivering the judgment of the Court of Exchequer Chamber, 
in the case of Goodwin v. Robarts (Law Rep. lo Excheq. 347), the 
Lord Chief Justice of England said : — 'We find it stated in a law 
tract by Mr. Macleod, entitled Specimen of a Digest of the Law of 
Bills of Exchange, printed, we believe, as a Report to the Govern- 
ment, but which, from its ability and research, deserves to be produced 
in a form calculated to insure a wide circulation,' &c. 

From Lord Hatherley, Lord High Chancellor of Great Britain. 

' Mr. H. D. Macleod was selected by the Commissioners for the 
Digest of the Law to prepare a Digest of the Law in relation to Bills 
of Exchange. He performed his task in a manner which shewed that 
he had an extensive and very intelligent knowledge of the law. 

'Hatherley.' 

From Lord Westbury, Lord High Chancellor of Great Britain. 

' The papers you prepared for the Law Digest Commission proved 
that you had a profound and comprehensive knowledge of a most 
important part of mercantile law. * Westbury. ' 



Works by the same Author. 



III. 
TIE THEORY AND PRACTICE OF BANKING. 2 vols. 

8vo. Third Edition, price 2Gs. 

• Which at a stroke placed the Author in the rank of the first 
Economist financiers of England.' Journal DES D^bats. 

* The Theory and Practice of Banking is beyond all question the 
most original and most complete and conclusive work that has ever been 
published on the subject.' Money Market Review. 



THE ELEMENTS OF BANKING. Fourth Edition, i vol. 

Crown 8vo. price ^s. 

* A volume remarkable for the extreme simplicity of its language, 
the singular clearness of illustrations, and its thoroughness of treat- 
ment.' Standard. 

' The work has the merit— too rare in the present day — of giving a 
great deal of thought and information in a very small compass. ' 

BULLIONIST. 



Mr. MACLEOD'S admirable handbook, The Elements of Banking. 

Edinburgh Courant. 



Works by the same Author. 



IV. 

TIE PRINCIPLES OF ECONOMICAL PSILOSOPHY. Second 

Edition. 

Vol. I. Price i^s. 

Vol. II. Part I. Price 12s. Completing Pure Economics. 

Vol. II. Part II. Mixed Economics. {In progress. 

' Of all the works on Political Economy prmted within the last fifty 
years none surpasses this in importance. You have advanced the 
science more than any one during the last half-century by the severe 
and judicious analysis to which you have subjected all the fundaniental 
ideas and definitions. ... As a proof of the conviction I have on the 
subject of the extent of the services you have rendered Political 
Economy, I add that it is this work, The Principles of Econo7?iical Phi- 
losophy, which henceforth shall serve me as a guide in my teaching at 
the College de France for the philosophy of the science. No other 
book can be compared to yours for the correction of philosophical 
errors. ' Michel Chevalier.' 

ECONOMICS FOE BEGINNEHS. Crown 8vo. price 2s. 6d. 
THE ELEMENTS OF ECONOMICS. Crown 8vo. 

[In progress. 

*^* These are the only works in the English language which give 
a complete exposition of the Theory of Credit, which was fully 
developed in the Pandects of Justinian 1,300 years ago, which since 
then has been the Mercantile Law of all Europe except England, but 
which has now become the law of England, together with an expo- 
sition of the modern system of Credit and Banking, which is merely 
the practical exemplification of the Principles of Credit contained in 
Roman Law. 






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